New Design to Cut Crime?

As the total amount of property that people own increases, so does the probability of loss of that property. These losses could be caused by theft or neglect but still represent a real disadvantage to the affected. The government of the UK is now urging designers to improve the design of items so that the number of thefts and crimes are reduced. This story by BBC News states that this has been encouraged by the reports that improvements in vehicle designs have reduced vehicle thefts by up to 51%. While I admit that I have not reviewed the data, it is pretty clear to me that this may indeed be a hasty generalization.

First, I am curious about the underlying assumptions and the tone of the government in seeking to compel designers to produce goods that meet that criteria especially since the public appears not to demand it yet. The reason here is that if that kind of theft-proof design were really in high demand, then the designers would have produced it without government intervention. Second, it is not clear either that the driving motivation for designers should be deflected from ease of use and enhancing user experience towards ensuring that a third party may not appropriate that good. Thirdly, the need for compliance with a rule that requires theft-proof equipment could raise the costs of equipment and products for those who do not wish to pay for that advantage.

In fairness, the article does not yet suggest that there will be compulsion for designers but I am worried by its tone because it suggests that the prevention of the theft of products should overwhelm other business considerations. To my mind, the potential for loss of valued property is part of the reason that insurance companies to exist and the upfront compulsion of design to reduce theft may not be the best way to spend the additional resources. Personal property is a tenet that i value highly but I must recall that the human element of carelessness explains a great amount of losses that people incur. That is unlikely to be reduced entirely by theft-proof design. The Home Office must be very hopeful that every mobile phone buyer will want to pay more for an improved design.

Another Lesson on Illegal Drugs Policy

Governments world over develop anti-narcotics polices with due regard neither to the lessons of past actions nor the realities of the economics of illegal goods. Fuzzy thinking now is wedded to the idea that terrorist groups are raising money from sale of opium in Afghanistan and that an additional objective of the fight against the Taliban is to eradicate opium cultivation.

As if the lesson was still required, Willem Buiter, a profesor of economics at the LSE, states in the Financial Times why the expenditures on eradication and military response are unjustified. This symbolic show of toughness ought to be saved for the Taliban and not to the farmers seeking a livelihood. he makes the strong case for legalization with taxation to pay for the treatment of users who may have developed a dependency. Otherwise, the continuing ban works to the advantage of the organized crime groups because only they can meet demand.

The area of narcotics policy is an appropriate one for multilateral action and rules. When nations decide that the views supporting a law and order approach to narcotics policy should be reviewed, they will know what to do.The unpleasant truth of decades spent fighting expensive but ill-informed drug wars is out there.

Paying for Pilgrimages

Many nations provide hidden or direct subsidies for activities by arguing that these activities have special value or under the infant industry argument. This article under the Reuters Africa news service states here that the government of Nigeria will scrap all subsidies for religious pilgrimages. Why any government should pay for any adherent to visit a holy site beats me.

Economic theory states that subsidies are almost always inefficient because they lead to the overproduction and consumption of goods or services beyond a level that would be cleared by the market mechanism. For this reason, subsidies lead to unintended consequences while distributing income and constraining the proper use of the money.

So one must support the abolition of the subsidies and stress that their withdrawal ought not to be justified only on grounds of high costs to the treasury. Public money ought not be used to support purely religious activities in a republic. With respect to the future pilgrims, their trips ought to be paid for by the consumer of that undeniably important service. This would allow for the theory of revealed preference to be tested. The pilgrimages must go on but the 25% subsidy should not even have been initiated in the first instance. Good decision by that government.

Carbon Taxes and Bottled Water

This editorial piece in the New York Times today argues the valid case that citizens of the US would be better served by drinking water from the tap as opposed to buying bottled water. It extends the argument by alluding to the environmental cost of bottling several million liters of water when a cheaper and ready substitute is available.

Earlier posts here and here questioned the real value of bottled water especially taking into account the existence of tap water as a substitute. I suspect that this is a lifestyle aspiration in addition to ignorance that makes consumers susceptible to the view that bottled water is safer for consumption. The expenditures in consuming up to 8 glasses per day amount to US$ 1400 against 49 cents for bottled and tap respectively. This is a compelling argument for a person who may need to save that much money. That it is has not led to reductions probably show that there's a stronger motivation informing that choice.

The environmental argument about the contribution of plastic bottles to environmental degradation merely shows that the taxes are not appropriately aligned and bottled water consumers ought to take up the cost of the disposal of the bottles. In addition, were a carbon tax to be instituted, the consumers of bottled water would fully pay for their contribution through their consumption choices.

OFT Fines British Airways for Price Fixing

Competition policy and law is an area of economic regulation that I favor for the reason that fostering competition between firms has obvious advantages for consumers of services. The prevalence and extent of cartel behavior and collusion between firms is sometimes difficult to accurately determine. This is because the ability to undercut co-conspirators in a collusive arrangement is a highly likely event. So the ability of the rest to retaliate is critical in keeping a collusive agreement going.

The BBC news reports here that the Office of Fair Trading levied a fine of up to £121.5m on British Airways following its admission to having colluded to fix fuel surcharge with Virgin Atlantic. I see this as very poor economic reasoning and enforcement of competition policy because Virgin was granted absolute immunity for reporting the collusion. The motivations of Virgin in seeking to collude notwithstanding, the outcome does not make any sense as Virgin registers a financial advantage over its competitor while appearing as the more virtuous firm. The equally guilty tale-teller is pampered.

Should US Doctors Take Pay Cuts?

It is now almost a sure thing that medical insurance coverage will be one of the major campaign issues during the US elections. Most of the candidates that have looked at it carefully are obviously aware that it is much more than dedicating more money to the problem. The uncontested fact is that the US spends a higher proportion of its GDP on medical care than any appropriate comparator within the OECD. In spite of this total expenditure, in certain respects the degree of medical coverage does not match.

Various reasons are readily given for this state of affairs and these include the fact that the design favours insurance corporations which are motivated to exclude many ill people on the one hand and the high prices of prescriptions drugs on the other. One factor that has not been mentioned very little has been the compensation for US medics. Alex Berenson's article in the New York Times argues with data that the compensation of US medics is at least double that of their colleagues in other high-income nations.

Even taking into account the fact that the compensation figures cited are probably based on conversions of prevailing exchange rates, it is likely that they would still be substantially higher were they to be adjusted by Purchasing Power Parity (PPP). I am at a loss as to why Us surgeons and other medical practitioners seem to exercise this degree of market power especially as medical skills are largely transferable across nations. the article states that the way in which compensation is structured moves doctors to recommend expensive procedures that may have cheaper alternatives and this suggests that US patients may be over-medicated already. One would have to look at the regulation of entry into the medical profession as I would expect that to moderate the upward crawl of wages. It appears instead to be distorting it towards the higher paid specializations.

A Case for Legalized Sports Betting

Any all-round sports fan or junkie knows that this week has not been a good one for administrators. Starting with the farce that the Tour De France has become because of suspicion of widespread and systematic doping by race leaders, a top sports professional engaged in an underground dog fighting activity and to the news that an umpire with the National Basketball Association is under investigation for betting on games in the league, sports has provided entertainment of a very different kind.

Understandably therefore, Justin Wolfers a forensic economist says something about the NBa referee. In this article in the New York Times, he states that the existing structures that outrightly ban betting on sports in the the entire US except for the State of Nevada is partly responsible. It is noteworthy that Justin Wolfers, has earlier co-authored a paper that found discernible referee bias in calling fouls within the NBA. this did not please NBA commissioner David Stern but I think this revelation that one referee may be betting on games suggests that there's a bigger problem than Stern can explain away by merely stating that it is quite rare.

Prof. Wolfers does not belabor the point but proceeds to suggest a regulatory approach aimed at vastly improving the situation. In short, he states that the outright ban on gambling is ill-advised and should be reversed to encourage bets that do not provide an incentive for corruption. This favors legalizing bets on the outcomes of matches and driving illegal gamblers towards the legitimate market. He appears to think that retaining a ban on the points differential of games should be retained as this provides part of the motives for umpires and players to act strategically by betting on subtle outcomes that they could influence. Bringing sports betting to the open would be far better than any alternative but betting on the points differentials is far more sophisticated but i see no reason for retaining ban here.

Quoting John Kay

"Today, the improbable belief that opaque financing arrangements can generate returns far in excess of those earned on underlying investments acquires validity only from being generally believed". John Kay

Where Economists Should Start

Many well-educated people have an idea about what investments are and have heard it preached by the talking heads on television and other media about the need to save and invest sufficiently for retirement or to build one's wealth. At the same time, a high proportion of the same people have this accusation against economists (largely true) that the study of dry statistics about inflation and interest rates in particular is neither interesting nor useful to them.

In spite of this, the success of many DIY books on investments and building a sizable fortune, shows that accumulating money and building wealth is a legitimate concern for today's professionals in both low and higher income countries. In the contempt for the subject of economics, these investment hungry professionals forget that inflation is real and that returns must be corrected for inflation for the sake of accuracy.

Writing in the New York Times, David Leonhardt explains what the purported record values of the Dow Jones and illustrates the common misconception and failure to recognize that the value of investment returns ought to be calculated in real terms. One of the reasons financial products advisers fail to emphasize this in sales pitches is because it would reveal that a large number of stocks that people purchase often represent mediocre returns in real terms.

UK Committee Reviews Afghanistan Progress

Over the last few weeks, this blog has had posts here and here covering the faltering war against the Taliban, by arguing that a mixture of the objectives would be detrimental to the primary objective. It appears that to roll together the primary objective of decisively defeating the Taliban and eradication of opium poppy growing is not prudent. This is because the Taliban is the legitimate military enemy, while opium poppy cultivation is a means for extracting livelihoods for a growing number of Afghanistan's farmers.

Paul Wood,reports here that the defense committee of the UK's house of Commons have issued a report that questions that approach too. Point six on that list is profoundly clear: "You can't fight the Taleban and opium at the same time."

It results in an unnecessary diversion that militarizes the war against opium, corruption and loss of public support for NATO forces. Fighting power and technological superiority does not help when the policy is incoherent. Defeat of the Taliban is not only possible but desirable while eradication of opium poppy is not NATO's war.

Melting Indian Coins for Value

Because coins are metallic and durable over time, the value of the metal used to make them exceeds the face value of that coin. As soon as this happens, astute traders begin to collect coins with a view to converting them to metal and make money out of that difference. The material effect of this arbitrage is that the Central Bank and tax payers lose from the fact that the cost of making coins is well above their face value.

I argue that this practice is a carryover from the days when gold or bronze currency reflected the value of the valuable metal from which it was extracted. Small traders in India have noted the measurable differences in the alternative value of Indian coins and are furiously collecting the same, having them melted and making impressive returns on that investment in spite of the fact that it is illegal to do so. As Subhir Bhaumik writes here, the coins are melted down, sent to Bangladesh and converted into razors. The incentive derives from the fact that the difference in the face value of the coin and the total value of the razors is 3500%. In between those boundaries is an opportunity to extract profits after deduction of the costs of melting and transportation across the border into Bangladesh. As the story states, even beggars are sufficiently astute to engage in arbitrage.

It appears that notwithstanding the reduction of the metallic content of the coins at the mint by the government of India, the arbitrage continues and the attempts to flood the market with coins only fuels the trade. The only workable and stable policy option would be to raise the value of the rupee coin closer to 35 Rupees. Otherwise, the economics of it is truly clear and the shortage of the coins will continue.

Inflation and HIV Infections in Zimbabwe

This article in the Washington Post reports that Zimbabwe has benefited vicariously from the poor economic management by the autocrat Robert Mugabe. The argument is that the extremely high rates of inflation have coincided with a systematic decrease in new infections with HIV over the last few years. The main reason posited is that most males in Zimbabwe had the opportunity to maintain multiple relationships but are unable to do so due to the drastic erosion of their incomes. More particularly, the story reports that this development is peculiar to Zimbabwe in the southern African region and is therefore a reflection of internal dynamics.

Admitting that the long-argued connection between HIV infections and economics are not very clear, one detects the thinking that the article and most of the persons quoted in the article think that the poor economic performance is responsible for the reduction in rates of infection.

While this idea is plausible, this blogger is cautious about the broad assumption. First, one ought to be careful with cross-country data on HIV infection rates in southern Africa and the entire continent in general. Secondly, correlation is obviously not tantamount to causation and besides poor economic performance, there may be other variables driving the fall in infection rates. All the anecdotes about men being unable to keep multiple relationships going do not substitute for real data. Thirdly, this blogger is not sure that HIV infection rates in Zimbabwe is singularly or overwhelmingly driven by prostitution as is assumed. Finally, it would be interesting to note the price and substitution effects to the reduced earnings of adult males. It just does not sound convincing that it takes a crisis in governance for people to realize that AIDS is a killer.

Wimbledon: Equal Pay with Equal Play is Fairer

I start with unreserved congratulations to Venus Williams and Roger Federer who are this year's women's and men's tournament winners of the tennis grand slam tournament held in Wimbledon. It is not appropriate to compare their paths to the championship that each deserves richly. Also different is the manner in which each closed the final match because Venus Williams quickly gained momentum and overcome her opponent in two sets while the men's final match was far more competitive and required as much perspiration as inspiration over five sets.

However, this year's tournament was the first during which the respective champions took away equal prize money. In this blogger's view, that was patently unjust to the men's champion and his opponents. The prize money was about US$ 1.4 million for each of the winners of the singles tournaments. Now, I fail to see the claim of equal treatment because without doubt, we all can count that the men's match was decided over five sets while the ladies match ended after Venus won in two straight sets.

Indeed, there's already the very reasonable and altogether just argument that the Women's game ought to be decided by the best of five sets in every round too. Neil Harmann of The Times reports on the finals and traces the logic for this argument here. Now that would be equal pay for equal work! Awful Announcing makes a similar argument.

Who's the Most Dependable Frauds Buster?

Suzy Jagger's story in The Times newspaper online story summarizes the results of an interesting study undertaken by the university of Chicago's Graduate School of Business. I have not managed to read it but it reveals that most of the corporate fraud in a large number of corporations in the US was reported upon by lower level employees. The story states that post room workers and secretaries are more reliable in reporting fraud than are their bosses, the Securities and Exchange Commission and auditors. These lower level employees then become the natural allies of shareholders.

I wonder why those at the bottom of the corporate rung are the ones that are most prone to honesty than the rest. I surmise that the rest are also most likely to be the beneficiaries or co-conspirators in cases of corporate fraud.

Forced Eradication of Opium in Afghanistan

In this earlier post, this blogger pontificated on why the fusion of the efforts to eradicate the cultivation of opium poppy in Afghanistan should not be fused with the real war against the Taliban. A very elaborate article by Jon lee Anderson in The New Yorker here traces the complicated results of the militarized approach that is informed by the misguided thinking that the two are correlated.

As is clear from this recommended piece, needless deaths have resulted from the march to clear poppy plants from small farms while the larger cultivators remain untouchable. Jon L. Anderson's sojourn through Afghanistan reveals why the approach has currency. it is that the eradication units are headed by officials that will not review their thinking but also need to emphasize that connection because they have a financial interest in eradication in spite of its efficacy or necessity. A number of them cite efforts in Colombia, Bolivia and other Latin American states without stating the benefits that emerged from that disastrous record. The prospects are far from good especially since the farmers are aware of the financial advantages of growing the opium poppy over cultivation of wheat. Apparently, what makes sense to these villagers is lost to well-traveled bureacrats!

Who's Rationing Fuel in Iran?

Over the last few weeks, news reports such as this one on the BBC news site have recorded the incidences of public and violent protests by some citizens of Iran because of the institution of a rationing of fuel that will be provided at heavily subsidized prices. To this blogger, apart from the reasons given about the need to build new refineries to process more petroleum, it is a bit clear that the economists in Iran ought to use this mini-crisis as the opportunity to educate their garrulous president on price theory. They may start by making this simple statement: Any good or service that is provided below cost will eventually have to be rationed because it will be consumed at far higher quantities than is efficient. added to the inflation rate that is estimated at between 20-30% annually, something will eventually have to give. The violence and the queuing is part of that large cost.

Covering the same story, this article in the Houston Chronicle reports that the animated crowds seemed to blame it all on president Ahmedinejad and wondered why a nation that bears a large endowment of crude petroleum should have to ration fuel. This is not a serious question and to assign the fault to an individual is unfair because the heavy subsidies are not entirely his creation. It has merely unraveled during his watch, no doubt prompted by the fear of impending sanctions regarding the ongoing plans to construct a nuclear complex that could be used for weapons production. In all fairness too, that substantial subsidy estimated at close to US$ 10 billion per annum could have been better designed and issued in form of vouchers.

While the sanctions would probably be an ineffective and blunt political tool, the main lessons ought to be that the great revenues from the sale of petroleum are not used well in keeping petroleum prices artificially low and that industrial policy ought to concentrate on expanding refining capacity. The pursuit of a nuclear plant building plan seems throughly misplaced while the crowds are rioting because of the lack of fuel.

Industrial Espionage In Formula 1

The Formula 1 team, Scuderia Ferrari dismissed an employee following allegations of unsanctioned transfer of its engine designs and technical data to an engineer from a competing team. In turn, the McLarens Mercedes team suspended its chief designer at whose residence the a sizable amount of data and technical designs were seized. Alan Henry summarizes the story on the Guardian here.

Whereas the McLarens team has undertaken to cooperate fully with the investigation and have not been accused of complicity in the theft, this blogger wonders what value the designs would have for individual engineers. However, with the benefit of hindsight, it is clear that the data and the plans have potentially enormous value for competing teams even if they did not intend to directly copy the designs. It is difficult to explain away the reason for the alleged transfer of the hundreds of drawings as reported in Planet 1. In addition, one can see very clearly the motivation that any employee would have to retain unauthorized information and exchange that for another good such as new job or simply to get back at an employer that has treated one unfairly.

Because this case is not concluded, I will be posting further updates on the real facts behind these allegations as they surface during the court hearings. The lesson here is that as property becomes increasingly held in intangible forms, the premiums attached to their acquisition will invariably rise. Whether technology driven corporations have understood the security requirements is another matter. What is clear though is that increasingly, the human element will remain the weakest link.

Goolsbee's Take on Sicko

Moderate views regarding the appropriate policy approaches to fixing health care messes in the US are a bit rare at this time. More often what this blogger encounters are vituperative statements that are not only lacking in subtlety but heavily-laden with smear words such as "greedy health insurers" on the one side and "socialized medicine" on the other. Taking a more incisive view, it is not difficult to see why blatant mis-characterizations abound. It is because the market for health care is particularly difficult to design well and protect against market failure. Dispassionate analysis has almost entirely disappeared in the shouting matches that have been generated by Michale Moore's movie, Sicko.

Austan Goolsbee, writing in the Slate Magazine here, runs through the facts of the problem on financing health care in the United States. Pointing out some of the glaring facts that the movie fails to acknowledge, he however concludes that the diagnosis of the problem is right while the policy prescription is not as well-informed.

Essentially, the well-argued piece sums up what this blogger has alluded to in earlier blog posts. First, the existing model for financing health care leaves many US citizens without any cover while placing a disproportionate burden on employers. Secondly, the insurance companies have an understandable incentive to keep the really ill from treatment because they pose higher risks. Thirdly, the possibility of a single-payer or universal health plan funded by government will not be the silver bullet because the demand for medical care will far exceed the supply.

Small Thinking Sinks Immigration Reform Bill

An editorial appearing on the LA Times sums up the regretable fact that the US Senates' Immigration Reform Bill has failed. With all the intransigence from both parties, I am sure that this grand failure has happened in spite of the best efforts from president Bush. As the editorial states, the main points of contention are the proposals to grants amnesty to illegal immigrants on the one side and the effects of immigrants on the wages of US citizens on the other. Without doubt, these are matters that concern a number of senators.

The sorry thing about the claims is that this grand failure resolves neither of them and the failure to take the bill forward through compromise is a classic illustration of posturing. Even if the number of illegal immigrants is a mere fraction of the 12 million estimate, it is highly unlikely that all can be effectively identified, rounded up and effective deportation orders achieved against them. Thinking of the costs to tax payers and the expended time of law enforcement officers, this is obviously not wise use of US tax payers money. As for the second concern that immigrant labor depresses the wages of low income earners, a myriad of studies have shown that the overall effect is not only positive in the medium term, but further that the effect is often temporary and of a low intensity.

What this failure to think broadly should portend for most of the senators is that this issue will have to be brought back for discussion at a later date. Immigration reform ought to be viewed more realistically and should not be an excuse for job losses that will occur anyway (to the Democrats). As for the other argument about the need to flex muscles about to express displeasure at illegal immigration and illegal extension of stay in the US; it may help to consider thinking of that fact as a sunk cost and not worthy of disproportionate expenditure in the quest for a reversal.

Fight the Taliban, not the Poppy Farmers

One of the most puzzling matters for this blogger relates to the outright refusal by governments to learn the costly mistakes that have been made in drug control policies. This article, by Richard Norton-Taylor in the Guardian shows that in spite of the escalated efforts to eradicate the growth of opium poppy, Afghanistan will have a record harvest in this year. As the story acknowledges, farmers in Afghanistan now account for 92% of global illicit production of that crop and the record harvest represents a 49% growth over the preceding year.

This blogger finds it quite curious that the military objectives of defeating the Taliban and affiliated terrorists is being tied to the fight for the eradication of the opium poppy from Afghanistan. To my mind, the rationale for the consolidation of drug policy and security policy is quite wrong-headed and results in an unfair use of a capable military outfit. In the interest of the larger security goals, the separation of the drug control policy and the security policy will ensure that the British forces are deployed more meaningfully in Helmand Province and the rest of that country. Otherwise, the evidence suggests that the loss to the Taliban will eventually follow the increasingly apparent failure in controlling the opium crop.

Just before any further resources are dedicated to the war on Opium poppy in Afghanistan, it may help to be acquainted with this paper: The Economic Theory of Illegal Goods: The Case of Drugs.

Fight the war that you can win. In other words, fight and beat the Taliban. That is the legitimate military target. This law and order approach is not the most beneficial way of facing the cultivation of opium poppy.

A Book on the Chicago School

The University of Chicago's record regarding the number of its students, professors and other associates that have made a contribution to the discipline of economics is altogether enviable. In this book review, the Economist Magazine dissects Johan Van Overtveldt's book, The Chicago School. It mentions the understandable and largely plausible reasons for the rise of this school situated in Hyde Park. The most interesting revelation in the review relates to the peculiar geographical location of the University which the author credits with having left professors and students with no option but to debate issues incessantly. That is an ingenious way of converting the disadvantage of being locked between Lake Michigan on one side and a deprived district on the other. That response is in itself evidence of the keen minds that were resident at the school.

I surmise from the review that the book does not gloss over the fact that Chicago economics, however influential is not without equally erudite dissenters. Indeed, certain professors in the school are leading critics of some of its tenets such as the efficient-markets hypothesis. this blogger will post a full review after reading the text in full.

Are These House Representatives Bullies?

This article in Forbes.com reports that the Financial Services Committee of the House representatives has summoned the five commissioners in the commissioners serving in the Securities and Exchange Commission for a hearing. the real agenda of the meeting is unclear as it is characterized as an oversight hearing. The representatives appear to be concerned about the profitable operations of Hedge Funds, concerns about Chinese acquisition of publicly quoted firms and the problem with sub-prime mortgages.

This blogger thinks that most hedge funds are run by such sophisticated instruments that the house representatives here are unlikely to make much sense of their operations through these hearings. The ostensible concern about the risks that arise from investment of pension funds into hedge funds could be regulated by the establishment of investment limits or fuller disclosure. bullying SEC commissioners is unlikely to cover whatever risks may arise from highly geared hedge funds and neither is the resort to higher taxes justifiable.

To their credit, it may well be that the legislators are intent on protecting individual investors but that is no reason to seek to punish successful enterprises merely because their business models are not comprehensible to a majority. successful enterprises are built on that fact; accomplishing tasks that other cannot and ensuring that they do not catch up. As for the real risks that a number of hedge funds would fail,I am certain that this law and order approach is less likely to reduce those risks one bit. Let hedge fund managers and investors be.

Judge Determines Ridiculous Suit

Henry Cauvin of the Washington Post reports on the decision about the ridiculous suit yesterday with a fairly predictable outcome. Having posted about the case here a while ago, the gratifying part for a dispassionate blogger is that the plaintiff's demand for US$ 54 million was not only outrightly dismissed but that the hearing judge determined that the plaintiff was entitled to zero dollars. Noting that the plaintiff retains the option of an appeal, I hope that it all comes to an end here. Let the judge get back to his work.

Can Toyota's Model Fix the Health Care Industry?

An earlier blog post concentrated on the reasons why it is increasingly difficult to provide adequate health care under a universal care approach. One of the reasons that was alluded to is that there are a large number of technological developments or surgical techniques whose costs are high but for which alternatives may be available. However, surgeons and the hospitals have understandable incentives to recommend the most expensive one because the profits that are generated from them are high. On the other hand, patients are more likely to insist on receiving the most sophisticated and costly procedures especially when another person is making meeting the financial costs. What results is an oversupply of medical care at the most expensive side of the spectrum.

Thus an attempt to institute a publicly funded health care insurance program would be faced with ever increasing costs and ultimate bankruptcy. A clever idea that has been introduced is the creation of an autonomous institution to determine the relative merits of new treatment procedures relative to the costs.

Writing on the Washington Post's Think TankTown page, Tom Emswiler reiterates the problems with health care provision and looking at the manufacturing methods successfully deployed by the Toyota Motor Corporation. Among these is the principle of adopting only reliable and fully tested technology which provides further justification for establishing the comparative effectiveness institute.

The requirement for this institute is undeniable but this blogger is cautious about the tendency to elevate every corporation and adopt its internally developed logic more widely. In essence, Toyota Motor Corporation is hugely successful but that is no reason to presume that wholesale adoption of its principles would engender similar success elsewhere.

Ridiculous Suit About a Suit

The conventional wisdom regarding vexatious litigation is that clients often resort to suing needlessly or perhaps making outrageous demands that foreclose the possibility of commercial settlement. This blogger has stated in an earlier post about the rising tendency for residents of the UK to become "litigation junkies" more recently.

I have had to rethink the view that most vexatious litigants are not only ignorant of the law but are often driven by the need to be vindictive. The New York Times reports this story about Roy L. Pearson junior who has sued a couple running a dry cleaning service for purportedly misplacing a pair of pants. The ridiculous part of the suit is not only that the costs of the suit have gone above the replacement costs of the pant, but that the plaintiff initially filed for US$ 67.3 million.

As the piece reports, the plaintiff is a judge and has been a legal aid lawyer. Absent a new revelation to this case, I am led to ask whether this is a really judicious judge as he declined to accept settlement for US$ 12,000 offered in March this year. Granted that the plaintiff later adjusted his claim to US$ 54 million, I think that the substance of this case is such that it is a mockery of the judicial process perpetrated by an officer of that court. Get a fresh pair of pants your honor and get back to work.

Double IP Protection for Software

Timothy Lee argues in this OP-ED piece in the New York Times that patent applications for software have gone too far. The thrust of the argument appears to me to be that patents are now being sought by software firms merely to use in strategic ways to extract rents from users and restrict competing firms from innovations.

It is not too difficult to see why corporations resort to patent applications for software when similar legal protections would inhere from copyright protection which is automatically available. This is pure strategic behavior calculated to raise the costs of any challenge to that patent. As this blogger has maintained, the proper welfare effects of stringent IP protection is increasingly becoming questionable because patent protection has gone too far generally and especially in regard to software. That this stringent protection is absolutely necessary for further innovations is a patent lie. Bill Gates used to know this.

Is Universal Health Insurance Affordable?

Judging from the commentaries, this blogger gets the very distinct impression that campaigns for the US presidential elections next year and the Democratic Party's candidate will need to say a lot of really sensible things about the possibility of universal health care. A highly impressive article by David Leonhardt of the New York Times assesses the conventional wisdom and debates regarding universal health insurance and finds that it is informed by the wrong assumptions.

It is clear that the proposals by Sentors Obama and Edwards respectively highlight the fact that universal coverage, while popular, is not the solution because part of the problem is caused by medical professionals pushing expensive medical procedures whose benefits are far from proven. It is clear then that the Edwards proposal would cover everyone but the costs would be unmanageable and wasteful while the Obama proposal that is concerned with efficiency probably will not ensure the coverage of the last person in the US.

Adding these clear contradictions to the fact that health economists cited in the piece are certain that health costs are growing faster than real incomes, one concludes that no easy solutions are at hand. So as all these candidates consider their proposals, the unpalatable fact may be that absolute universal health coverage may not be affordable. David Leonhardt makes it clear that a purely ideological orientation will lose to dispassionate analysis. It is beginning to look as if absolutely universal health insurance is even too costly for the most productive economy in the world. The politics of it is easier than the the economics of it. I figure that at one point, the discussion will have to get to what can be made really universal.

No More Internet Cafes in China

Most people take it entirely for granted that China's impressive growth and export success implies that its bureaucrats and public sector workers are very savvy. While the GDP growth, exports and poverty reduction data is certainly impressive, I sometimes think that in some respects, this government tries to be too clever and turns out to be clever by half.

This story in the Business Week reports that the government of China has ceased issuance of licenses for new internet cafes and that its inspectors will investigate whether existing license holders are renting out their licenses or failing to register the identities of users. One wonders how a nation that has achieved unprecedented feats in economic development can have such small thinkers for bureaucrats.

This is completely wrong-headed policy that leads one to question what the magical number of Internet cafes ought to be. Cant most bureaucrats find better things to regulate?

Quoting William Lewis

"That so many people live in low-income countries and so few in middle and high-income countries indicates that economic development is hard." William W. Lewis

I am reading through this book by William W. Lewis and I found this quote on page 135 quite profound. I consider it an important point to recall as India, China, Brazil and the whole lot of African countries consider raising incomes and improving welfare. Development is not fluked and neither is it the result of centralized planning and disproportionately large government.

How Not to Rebuild Mumbai's Dharavi Slum

This blogger visited India for about a week in March this year and passed through both New Delhi and Mumbai cities. My major conclusion is that despite the fact that the country has recently maintained an admirable GDP growth path, the visible problem of housing for the low-income city dwellers is evidence that development is both chaotic and very complicated. I saw the unplanned settlements in which some of Mumbai's most indigent residents dwelt in and concluded that there's yet work to do.

Now, this piece by Ramola T Badam in Forbes.com reports that the Maharashtra State government has sent advertisements seeking foreign and local builders to undertake a project to replace the shantytown known as Dharavi. It intends to build free homes for its 57,000 dwellers over seven years. Understandably, there is already controversy about the number of dwellers with some insisting that the total number of dwellers is closer to a million.

This need to assist the indigent dwellers of these neighborhoods notwithstanding, it appears to be a directive based on the development of a solution and foisting the same on a problem. The project is to be financed entirely by a private sector builder and is calculated to cost US$ 2.3 billion. This works out to a nominal US$ 40,350 for each household if the numbers anticipated by the government are accurate. This would be extremely generous but I am certain that this kind of approach constitutes very poor use of these resources.

Assuming that the money is available, the option ought to be given to each household to determine whether it would prefer to accept the money in cash or take up the intended dwellings when they are complete. A similar argument was presented by Professor Edward Glaeser of Harvard University following the devastation of New Orleans by Hurricane Katrina in 2005. Professor Steven Landsburg also presented a similar argument on Slate Magazine here.

In short, the problem of uninhabitable housing need not be resolved with a big construction project. As the main article contends, there is a great likelihood that this project will only be a bonanza for builders. Granted that the Dharavi may have up to 1 million residents, a good number may still prefer a check or voucher for a nominal US$ 2300.

Formalizing Mumbai's Meal Couriers

I am fascinated by the rise of entrepreneurship in many developing countries and the existence of the Dabawallas in India is worthy of more incisive study. To the extent that I can tell from the article in the New York Times, it is an altogether efficient even if informal courier service that delivers hot meals from homes to specific areas in Mumbai city. I surmise from the article that it does an excellent job of ensuring that the meals are safely conveyed and the containers returned through a color code on the containers. The rest of it is pretty labor intensive and thrives because the cost of labor in Indian cities such a Mumbai is comparatively low.

This business idea must have survived from delivering excellent value to its clients as the article traces its existence to the period of the British Empire. While I would classify it as an informal business that delivers high value and quite efficiently, it is apparent that it is only partially merged with aspects of the formal economy such as the railway and infrastructure network in Mumbai and its innovative use of text messaging and e-mail.

I consider that further value could inhere from the adoption of bar coding, standardized containers and a database of deliveries and GPS in addition to expansion beyond the delivery of meals.

Economics in the Service of the Environment

Everyone seems to have a highly charged opinion about whether stopping Global warming and its effects is a policy that is worth pursuing. The global nature of the challenge is one of the reasons that hammering out sensible responses is difficult. Whereas consensus on the causes of global warming is still being debate on the fringes, that it is an empirical fact is irrefutable.

Dependence on petroleum fuels largely for generating energy on the one hand and for fueling automobiles makes it imperative that prescriptions that deal with ensuring the cost of increased driving must now be paid by motorists. Professor Edward Glaeser of Harvard University presents a well-argued and pithy piece in the Boston Globe addressing the need to consider the costs against the benefits of environmental policy in order to ensure sound and effective policy responses.

The two most profound points in the argument are the indispensability of a carbon tax to ensure that polluters pay the real cost of the externality of pollution on the one hand, and the need to offer large public prizes that reward innovations that could then be utilized throughout the planet.

What next for Daimler and Chrysler?

Reading this article today, the following thoughts occurred to me:

I have no data to post here right away but I am given to the view that in spite of the great affinity and demand for automobiles that characterizes this and the past century, there is an obvious surfeit of automobile manufacturing corporations. I cannot recall precisely the reasons given for the merger of Chrysler and Daimler when it occurred but I am certain that it was a critical event in that industry and one that was largely expected to change the automobiles landscape in both the Us and Europe. Here was the merger of great German engineering with the large market in the US. It quickly became evident that the expected efficiencies not only failed to work, but that Mercedes was in turn affected by quality problems.

In the article above, Andrew English traces the merger and recalls, with the benefit of hindsight, early signs that the merger would most probably fail. I am a skeptic of this kind of hindsight for the reason that while the merger was then considered quite risky, a good number still considered that it would enhance value if it could be made to work. as one can tell, at that time, there was no mention of the health care and pension liabilities that prominently feature as the explanation for the poor performance of the automobile manufacturing firms in the US.

Chrysler has a number of divisions with varying levels of profitability. Impliedly therefore, not all of these divisions are losing money. Competition is now faced from established Japanese manufacturing firms and the overtures from Chinese firms are also indicative of the fact that there are profitable areas. At the same time, these also support my view that given the number of automobiles manufacturers and the price competition, there may be far too many automobile manufacturing firms already. Noting that the Porsche's annual returns of 17% are the industry's highest, the message for Chrysler ought to be clear, take out the unprofitable divisions.

Private equity firms are increasingly taking over many corporations with the intention to restructure them and sell them out with huge returns. Andrew English correctly anticipates what Cerberus Capital might do when it acquires Chrysler. My guess is that it will very separate the profitable divisions from the rest and carve out the firm and thereby prove that the sum of its parts is probably greater than the whole. The advise for Daimler, with the benefit of hindsight is that corporate hubris often precedes the inevitable fall.

New Crime Fighting Policy

That a preponderant amount of crimes that are committed are often motivated by the quest for economic gain is beyond debate. Police forces around the world are therefore thinking of more sophisticated approaches to emasculating organized criminal groups and individuals. An interesting story by Paul Lashmar in The Guardian reports that Law Enforcement agencies in the UK recovered 125 million Pounds Sterling from an assortment of convicted criminals over the year running from 2006-2007.

While I agree that crime is without doubt a social menace that also disrupts economic life, this blogger is unsure that this approach by the police represents correct approaches to the reduction of criminal behaviour. As the story states, the recovered sum was based on a target and the reason for the celebration is because of the attainment of that arbitrary target. To my mind, that is no reason for celebration because it merely implies that far from keeping the targets for law enforcement action away from committing crime in the first instance, this approach means that the police and other agencies would merely be looking to react after the acquisition of fortunes.

The policy is made even worse by granting a direct stake to the specific departments and the courts that succeed in recovery because they become entitled to a portion of the same. It is not an overstatement to expect that conviction rates could rise where courts may gain from ensuring that recovery takes place. In addition, the quest for recovery by the Asset Recovery Agency through the civil law process not only reduces the burden of proof but may divert police resources disproportionately towards the specific crimes that allow for the application of the Proceeds of Crime Act, 2002.

In my view, police forces ought to concentrate on ensuring that crime does not take place in the first instance and having failed to do that, should then apprehend the criminal and ensure prosecution. Placing judicial officers and police forces in a position of interest in the resolution of a specific case and not another based on arbitrary targets for asset recovery is plainly bad policy. It may succeed momentarily in hurting selected criminals but more importantly, it would corrupt the law enforcement agencies. Criminals and these agencies in the UK may be on the same side now. They want the money!

Economics of Information Security

Given the way in which new viruses spread and easily infect PCs, it is clear that the security industry is forever chasing a moving target. The reason for this being that certain programmers are dedicated to producing and circulating worms quite regularly. in spite of all this, the ease with which PC systems are regularly infected and the failure to regularly update anti-virus programmes ensures that viruses remain in circulation and on occasion explode as epidemics infecting networks throughout the world.

Many blame the ubiquity on the Windows operating system since this enables the creators of these viruses to identify points of weakness in the unduly large operating system. However, the more persuasive assessment of the lack of security in IT systems is because the costs of security failure are largely borne by the users and not by the creators of products. Naturally therefore, there is insufficient incentive to ensure that the most dominant operating system is as secure as possible. As one sees therefore, it would not constitute good expenditure for Microsoft corporation to spend its money in ensuring security because it can easily externalize the cost of the failures. A complete argument is made by security academic and consultant Bruce Schneier here.

Taking the ubiquity of the operating system on the one side and the ability to externalize the costs of its security flaws on the other, I venture that the last factor of the human element is considerable too because it allows for the circulation of viruses. This article from Reuters describes how a computer expert placed a very clear advert on the internet offering downloads of free viruses and had 409 people click on it. In my view, even a small fraction of this number would suffice in sending the virus through networks and systems and thereby generate an an information security systems epidemic.

A Very Expensive Embassy Building

The Guardian today reports that the US government has largely completed an embassy building to house both the residences and offices of US officers in Iraq (Baghdad). The impressive fact about it all is not only that in spite of the difficult conditions this has been the single project that has been completed rather promptly and on budget, but that it is the most expensive construction of an embassy by the US.

If it were not for the fact that the construction costs of embassies and ambassadorial residences are not easily identifiable, this blogger would provide a list of the most expensive buildings just to get the perspective. That notwithstanding, at a reported cost of US$ 592 million, it is one expensive building. In fairness, this is a building whose costs represent the peculiar risks attached to maintaining an embassy in one of the most dangerous patches of real estate in he entire world today. I would wish to know whether its sturdy bomb-proof construction has taken due account of the diverse security risks that diplomats would face. All I am certain about is that its construction is a signal that the US will have a good number of staff in Iraq for quite a while.

From the public interest point of view, to what extent does the design differ from known economic principles for the construction?

Quoting George Stigler

"It is to be observed that economists who defend monopoly in antitrust cases are better paid than the governments economists: Do sinners always earn more than the virtuous who combat them? Probably yes; one must be compensated for bearing the opprobrium of sinning." George Stigler

Anyone with interest in regulation of firms and industry must have encountered George Stigler, to who was awarded the Nobel Prize in the Economic Sciences in 1982 for "his seminal studies of industrial structures, functioning of markets and causes and effects of public regulation." The quote above, extracted from the very capable economist's publication, Memoirs of an Unregulated Economist on page 95 is undeniably perceptive. The text is particularly clear in the description of the Chicago School as a method of study and a policy position with emphasis on rigorous microeconomic analysis. An interesting explanation of what economists refer to as the compensating differential.

A five star book written by a five star economist and a good entry for the 50th post on this blog.

Britons Sue and are Sued

As simplistic as conventional wisdom tends to hold, many believe that US citizens are especially litigation crazy and that this is perhaps correlated with the high number of lawyers in that country. An article in The Times now quotes a survey and makes the claim that Britons are becoming "litigation junkies" too . It uses the fact that every year, 2 million people seek legal advice and that thousand consult lawyers weekly.

On its own, this blogger sees no reason to conclude that that makes for a nation of vexatious or over-exuberant litigants. However, when one sees that 1 in 500 visits to the hair salon results in a legal dispute, with a further 1 in 1000 visits to a restaurant leading to a court battle over the menu, then perspective sets in. Added to this is the interesting fact that 1 in 20 has taken legal advice over rogue traders or shoddy builders.

While wondering whether increased isolation may be a driver, I encountered the data that the same survey revealed that 1in 50 of the instances in which advice was sought was against a family member and even this was with divorce excepted.

Apparently, when people are not in conflict with one another, then they are faced with infractions of the criminal law, a trend driven by increased regulation of people's lives through law and the creep of the nanny state. Men are more prone to committing crime and lead in committing motoring offenses while women are far more astute at altering price tags while shopping. I wonder why.

The greater point in this fine article by Frances Gibb is not as much that there's a spike in litigation but that the subject of litigation appears to be getting particularly petty. On the other hand, it also shows an expansion of the quest for advice across many more frontiers in people's lives. Concern about the outcomes and costs are also significant factors and this is proof perhaps that legal action is a strategic game.

Congestion Pricing Coming to New York

One of the most difficult points to make to the general public anywhere in the world is that all scarce goods and services can be priced to achieve near efficient use. This may be explained by the failure to realize that the use of public facilities such as highways and roads are not necessarily free and this realization accounts for the congestion experienced in major cosmopolitan areas. Covered in an earlier post here, what started as an unpopular experiment by Ken Livingstone of London is proof that proper application of immutable principles of economics can improve outcomes.

Since the spectacular success of the initial introduction of road pricing into metropolitan areas of London, the idea has gained broad, even if begrudging respectability.

Now, Michael Bloomberg, the mayor of New York is arguing forcefully for the introduction of congestion pricing within the metropolitan area. A well written commentary in the New Yorker by Elizabeth Colbert discusses the context and the prospects of congestion pricing in New York. This is long overdue.

My Favourite Hedge Fund Managers

Any person who takes the responsibility for managing and investing a billion dollars has to be extremely brave and self-assured. In spite of my reservations about the abilities and the arcane mathematical models and programmes that are employed in execution of investments by hedge fund managers, I am compelled to admit that a select few such as Stephen Cohen and James H. Simons of Renaissance Technologies do genuinely stand out.

There's no doubt that these two are a special pair even among the generally stellar crowd of hedge fund maestros. The similarities with others are numerous but Cohen and Simons seems to eschew public attention. Mr. Cohen likes to buy expensive pieces of art and supports art works generously while James Simons likes geometry and mathematics. Ben White of the FT writes this interesting profile of Mr. Simons. Granted that this piece hardly suffices in knowing much about him but it tells something about his interests and the diversity of PhDs that suffuse the firm. Medallion technologies charges 5 and 44 as opposed to the 2 and 20 rule and this raised no problem when outsiders were part of the subsidiary fund.

Am I alone in thinking that the campus, the gym and the consolidated computing power is quite akin to one Google?

Royalties for Yoga Poses

I keep wondering just how far the quest for IP rights will be taken before something gives. It seems to me though that those who have gone to the extent of registering intellectual property claims (whether trademarks or copyrights) on Yoga poses have taken it too far and are beginning to give the entire Intellectual Property regime a really bad name. Suketu Mehta argues in the NYT that individuals are making this big stretch and making for a laughable outcome.

Unlike the author who traces the problem with piracy of traditional Indian knowledge to the World Trade Organization's intellectual property rights rules, I am only concerned with the oddity and implications for enforcement of any violations regarding protected Yoga poses.

Evian Gives Way to Tap Water

I have commented in an earlier post on this blog wondering about how lucrative markets for products that a rational shopper would not purchase do arise. In that post, i queried the logic behind the purchase of ridiculously priced bottled water when tap water was often good enough. It appears that i failed to take full account of the snob appeal that drinking bottled appeal seemed to provide to people seeking to look posh. Writing in Slate Magazine, Daniel Gross states that it appears that the ruse has come full circle and everyone seems to realize that shipping bottled water is not entirely beneficial to the environment. It is laudable that tap water is back in vogue and for good reasons that include its very fair cost. as the article states, the US is the largest consumer of bottled water and the trend may be diffused to the rest of the globe.

It is unlikely that this will happen to diamonds too and so my hope is that sometime soon, Hollywood stars and other wannabes will come to the realization that outside industrial uses, ornamental diamond is just a bunch of polished carbon.

Quoting Thomas Sowell

"Some of the biggest cases of mistaken identity are among intellectuals who have trouble remembering that they are not God".- Thomas Sowell

This is certainly a memorable quote that the commentariat and the talking heads ought to recall. However, I have not once read a more abstruse piece from an intellectual this week. Granted that a number of stand-alone sentences are rational from libertarian and classical liberal stances, the piece reads as a cut and paste job from a scrap book. Brad DeLong is more blunt.

Nativism as Immigration Policy

Of all the issues in which public policy finds least guidance from the general public, the matter of immigration is right up there. There are lots of myths about the harm that immigrants cause when they move across borders throughout the world. While one may understand the natural apprehension that comes with the influx of foreigners into a country, the leading arguments against immigrants in all countries include the claims that they are opportunists who try to take advantage of welfare state provisions,drive crime rates, are tax evaders and lead to a decline of wages for the poor in the nation to which they emigrate.

Most of these claims are supported by qualified studies here and there but a good number of these claims do not stand to objective scrutiny. Sebastian Mallaby, an Op-Ed columnist with the Washington Post revisits these major claims and cites studies that debunk a good number of them. The conclusion is that these claims are mere nativist rants by demagogues. Most disappointing are the politicians in the US who know better but would rather duck the issue. In this respect, most countries, irrespective of the levels of income tend to be universally uninformed.

More Dubious Data on Gun Policy

While commenting earlier on this blog on the loss of life due to mass shooting at Virginia Tech Campus, I mentioned that one of the more annoying things about the mater was that the talking heads were having a good time pushing forward their predictable prescriptions for the policy on hand guns. I also stated that either side is trying its best to selectively pick details that confirm that a tighter gun control policy or looser control that allows freer gun ownership are silver bullets for this problem with gun violence perpetrated by male.

Making reference to one case of pontification, I referred to the the shortcomings and serious data errors in the book More Guns, Less Crime. Well, the numbers guy at the Wall Street Journal makes a more detailed point about the thoughtless deployment of numbers in the ongoing policy debate. As he states, most of the numbers used in support of either side of the intractable problem are altogether inexact. However, the ability to deploy numbers in policy discussions arrest attention and this will happen in this and other policy contexts as well. Watch the numbers.

Stock Market for Star Athletes is Here

Most professional sports are already organized as corporations in which stocks are held in private or by a wider public. An interesting article on Yahoo Finance brings forth the argument that a market for creating a market for trading in professional athletes in the same way as stocks are traded may be established soon. Essentially therefore, this market would involve trading stocks in professional athletes by taking positions on the anticipated performance during their careers. Since trading in stocks now is already about making judgment about the performance of certain corporations in competition with others.

As the article states, an athlete would trade up to say 20% of future performance earnings to a trust, which would in turn sell stock based on their value to the public. As one would expect, the value of that stock would fluctuate with the performance of the athlete.

I have no doubt that the athletes whose stocks would be most traded would be those playing in the NBA, NFL, and soccer leagues in Europe. However, having just watched the London Marathon yesterday, I am convinced that buying into the future of the less well known Kenyan athlete would represent very good returns. While that is pretty obvious, I am interested in finding out how data will be readily utilized to disaggregate the contributions of athletes in team sports such as soccer.

Adding Nonsense to Virginia Tech Tragedy

I am unfamiliar with the ideological orientation of Mr. Ben Wattenberg and initially was impressed that he seems to propose that there ought to be no vituperation and overreaction to the tragic events that occurred at the Virginia Tech campus on the 16th April 2007. On the whole, all people in the US and outside (as I) agree about is that the perpetrator was not too well and that these events ought not to have happened. Thereafter, it all descends to sometimes puerile arguments based on absolute positions.

Having watched lots of TV debates and pompous punditry on the causes of the tragedy and listened to the simplistic answers being offered such as absolute gun control on one side against the equally tired arguments that guns do not commit homicide, I read the first paragraphs of Mr. Wattenberg's blog entry on the Washington Post in earnest. Appropriately named Think Tank Town, I was disappointed to see that while proposing the avoidance of self-condemnation, the author then thoughtlessly quotes another whose main publication was has not only been discredited but one who also sues Prof. Steven Levitt for disagreeing with his methods and conclusions. Perhaps Washington is not as much Think Tank Town as it is the incorrigible partisan’s hovel.

As an aside, I read the book, More Guns, Less Crime that Mr. Wattenberg appears so impressed with and had to revise my conclusions from it after some very serious errors were discovered in it. Nice theory but not empirically supported and the data is suspicious. Mr. Wattenberg should avoid the trap of proselytizing for now.

Testing for Tastes in Music Lab

About three years ago, I enthusiastically acquired a copy of Duncan Watts' book, Six Degrees: The Science of a Connected Age. I commenced its reading with enthusiasm and admittedly learned a lot about the science of networks and network theory in general. Fascinating as the discovery of fat tailed curves and clusters, together with the illustrations of the Bacon numbers game, I failed to see the immediate policy applications of this very carefully presented and indubitably innovative work.

Duncan Watts, an accomplished physicist and now professor of Sociology at the University of Columbia has used the internet to conduct informative experiments such as the Small world experiment whose results were presented in his first two publications. Writing in this New York Times Magazine article, he describes the results of the other experiment in which he and professional colleagues try to untangle how tastes in music are formed. It is now apparent that contrary to my initial thinking, network theory and the science of small worlds has a potentially large number of applications in commerce and perhaps in policy too.

However the most critical insight is that commercially successful cultural products could result from a confluence of forces and could not have been predicted. All commentary about why a certain product is successful is more likely a reflection of being clever after the fact. He still proves that good quality music certainly stands out but gains momentum because of the fact that it has been acquired by others.

This article leads me to regret the fact that I was not too keen while reading Six Degrees and that I did not take the early opportunity to participate in the Music Lab project. To my mind, its most profound implications are for professionals who market products. They ought to go figure!

Bernanke: Lay off Hedge Funds

The Chairman of the Federal Reserve Bank of the United States of America considers that further regulation of hedge funds is not in the interest of the public or beneficial to financial markets. Indeed, Ben Bernanke states that these financial institutions bestow benefits such as increased liquidity and improvements of risk sharing. His very correct and defensible proposal for the systemic risks that they face is that of prudence on the part of investors, their managers and counterparties.

Simply put, why fix it if it ain't broke?

Getting the Economics of Hedge Funds Right

Some of the loudest commentaries over this year have concentrated on the large bonuses that Wall Street firms distributed among their associates and partners as rewards for successful trading performance in the previous year. Granted that these rewards represented enormous sums of money,this blogger remains unconvinced that there is particular reason for concern about such high incomes.

However, anyone who bears a genuine interest about professionals who earn huge sums of money ought to review the reported incomes of hedge fund managers. This extremely informative feature in the New York Magazine takes readers through the distinguishing features for hedge funds, the psychological make up of the more recognized hedge fund managers and the genesis and reasons for the momentous growth of the industry.

It turns out that most hedge fund managers not only have peculiar views about investment, but that the industry seems to be built on the assumption of perpetually high returns.The typical fees structure is based on the 2 & 20 principle wherein the fund shaves off 2% for annual management fees and 20% of the absolute profits. The rise in the number of hedge funds leads to the question about the degree to which grand lessons from LTCM's collapse are relevant at all. With the proliferation of hedge funds and the superstar founders, the likelihood of a perfect storm are ever higher. As John Kay reckons, the extreme confidence in the ability of models employed by this category of investors are such that such returns cannot be guaranteed. Any model is as weak as the assumptions built into it in addition to the failure of the model itself.

Developing Markets Without IP Enforcement

It is clear that stringent enforcement of most intellectual property rights have the effect of granting monopoly rights for the exploitation of ideas or designs to firms or individuals. However, an enduring question among lawyers, economists and physical scientists is whether intellectual property enforcement of copyrights, patents and trademarks are altogether a precondition for innovation and development of products.

I am glad to link to Hal Varian's article in the New York Times today arguing for a more considered interrogation of the conventional wisdom that stringent protection is the only way to defend certain markets. This piece does not resolve the issue but argues cogently and links to other papers which attempt to demonstrate that not all industries benefit from IP rights enforcement. This certainly will not end the debate but points to the need for more incisive market analysis to develop principles that would allow for better public policy.

McDonald's in India

While visiting India to attend a formal meeting a couple of weeks ago, I was quite surprised that the McDonald's near the market situated on Janpath Road in New Delhi served no beef burgers. This is in spite the fact that I am aware that the adherents of the Hindu religion completely eschew the consumption of beef. One may hastily conclude therefore that beef burgers would have no meaningful market for McDonald's restaurants at all.

In trying to reconcile this curious fact with the cosmopolitan nature of the main India cities in a discussion with friends resident in New Delhi, we noted that India is home to nearly 200 million citizens whose religious persuasion may not have injunctions against the consumption of beef. Why then is the McDonald's India menu largely vegetarian?

Another puzzle concerning geography and markets is that the McDonald's India's restaurant locator facility shows that most of the McDonald's restaurants are situated in the middle of the country and hardly in the southern and eastern parts of the country. I wonder what informs this pattern of investment and consumption of veggie burgers?

Are Corporate Tax Payers Less Honest?

Few people would find it surprising that another study states that the income inequality in the United States has been growing. Many conventional measures of the differences in income show that the top 1% take away a far greater proportion of the overall income than was the case in the preceding year. David C. Johnston, writing in the New York Times today, discusses the review of IRS data by two professional economists whose main conclusions are not surprising to me.

The more surprising fact in the article is the claim that the disparities may be even greater due to the fact that income tax compliance varies between individuals and corporations. The IRS is reported to state that it is able to tax 99% of wage income while netting only 70% of corporate and business income. That is not only a huge gap in percentage terms but also in the amount of cash that is foregone. But more interestingly, does it suggest that corporations are less honest than individuals?

University Education

That intellectual capital is highly correlated with growth in incomes is hardly debatable today. university education is therefore a highly sought commodity because it represents good investment. I notice too that many private or publicly-supported universities have established law and business schools with the premise that college education today should reflect the skills that are directly demanded by businesses. Writing here, it appears that John Blundell of the Institute of Economic Affairs thinks that this view is altogether too limited and even uninformed.

"I am not arguing for a university that only trains young people in vocational courses. It is a vulgar error to think universities are merely supply resources for business. A good education teaches critical and lively thinking." John Blundell

Are Financial Flows Really Subsidies?

This article in the New York Times Magazine dated the 25^th March 2007 by Tina Rosenberg identifies some of the ways in which financial transfers occur between the low and high income countries. Among the ways through which this occurs are royalty payments for products developed in the latter countries, the movement of professionals trained by developing countries and the completely idiotic incentive structures that most developing countries impose on themselves in order to attract foreign direct investments.

Given the abrupt conclusion of the piece, this blogger wonders whether it was intended to merely catalogue the ways in which financial resources and income from investments traverse borders or whether there is an implied injustice in the fact. Still, Tina Rosenberg clearly fails to acknowledge a set of facts that should be useful. Sovereign nations reserve the right to purchase US treasury bills and the extent of that purchase is left to their judgment as the US government appears to have done. In addition, the departure of the professionals trained in low-income countries reflects the fact that they seek places to apply their skills most creatively and profitably. That these nations have failed to provide this is surely not a creation of the higher income countries. The one point on which the author could have cited a wider source of arguments is on the migration of professionals to the high-income countries. The loss that occurs from the departure of trained professionals could be substantially ameliorated by ensuring that all of them reimburse their governments for any costs that went into their training. It is highly unlikely that professionals whose services are in high demand would be compelled to work in countries that do not provide sufficient support for them to stay.

Sympathy for low-income countries aside, the royalty flows in respect of pharmaceutical and entertainment products represent the returns that firms in the higher income countries have accrued by selling the products of their research and development. The main reason why the low-income countries are not recipients of such flows is because they have not developed firms who export such products. The element of subsidy that the author alludes to is altogether incorrect and misinformed.

Finally, it is obvious that the analysis of financial flows is incomplete without consideration of the flows and back flows that enable readers to appreciate the net position.

Silicon Valley Seeking Diverse Energy Sources

In spite of all its acclaim, many still associate Silicon Valley almost entirely with information technology products and software because these provide the bulk of the activity that is undertaken in that innovative circle. Biotech and pharmaceutical research also has developed within this technological and process innovation location. Firms in Silicon Valley are being established to add to the furious search for alternative energy sources. An article in the New York Times carefully compares the environment in the valley now to that which prevailed during the internet boom of the 1990s. The entrepreneurs though are aware that demonstrating the results by developing workable products are essential and that this time, few of these upstarts will survive for long merely on the basis of expected returns.

Interestingly, the research and development ideas that are being pursued are quite well-founded, judged by the fact that accountants, lawyers together with venture capitalists are reorienting firms towards participating meaningfully in the US$ 1 trillion energy market in the United States. Admittedly, there are no guarantees but with the money rushing into these firms, it is possible that the results may be just what is needed for diversifying the available sources of energy. for this blogger, the fascinating thing is how the accumulated knowledge and skills in the Valley is being deployed across several industries.

Stiglitz Endorses Prizes

It was stated in this blog in an earlier post that a substantial monetary prize would be ample incentive for finding effective and efficient solutions to contemporary problems such as HIV/Aids and the identification of any alternative sources of energy. Prof. Joseph Stiglitz argues in an article that the use of prizes as a mechanism for ensuring the development of drugs for cures and vaccines that are neglected by the pharmaceutical industries on grounds of the lack of firm markets.

The use of prizes would be in response to the need to limit the monopoly that drug companies bear in the form of patents without affecting their ability to develop drugs that are bound to be more lucrative for them. With an adequate fund, vaccines and cures for the most intractable diseases such as malaria and HIV/ADS would be at hand because the management of these diseases is more profitable for drug corporations at the moment. Still, Prof. Joseph Stiglitz acknowledges that the use of prizes will not of necessity replace patents. Over time, the distribution of innovation and rewards will be determined by the relative efficiency of either method and the degree to which competitive pressure between the two will spur innovation.

Administering the Minimum Wage

Revision of the minimum wage in the US was first in the order of business during the legislative term following the elections in November 2006. The working poor in America found support in the passage of bills by both houses of the legislature to raise the minimum wages. Apart from the standard arguments about the effects of a minimum wage on overall employment and the possibility that it may displace the workers who are most at risk of losing employment, there was less prominence accorded to the most effective way of ensuring that the proposed measures result in increases in the real wages of the working poor. Instead, the legislative houses sought to solve the question of raising the costs of labor to business by subsidizing corporations that hired lower wage workers.

Sarah Hamersma reminds readers in this New York Times opinion piece (subscription required) that this approach was far from efficient because the historical record shows that eligible firms hardly ever claim the credit. More importantly, she argues that there is no evidence that employers expanded their pay rolls in response to this measure. This latter effect is not inconsistent with the expectations of the legislators who passed the bill because it was ostensibly intended to protect those low income workers.

While the tenor of the author’s argument is that the idea of raising the minimum wage has little positive effect for the low income earner, to my mind the salient effect is the design problem which ensures that the subsidy goes through the firm when it could have been directly transferred to the worker. The merits of he minimum wage enhancement policy notwithstanding, the mechanism for channeling it is incredibly circuitous and does not subsidize the worker directly.

Quoting Larry Summers

"It is easier to start knowing economics and learn how to factor in politics than to start with politics and move to economics." Prof. Larry Summers

Unlike many professional economists who deliberately eschew commentary on public policy and the political, prof. Larry Summers tends to be uncharacteristically forthright with opinions on policy in general and in select areas of normative economics. This blogger considers that accomplished economists should increasingly tell their stories in a a world in which the opportunity and mechanisms for dispersal of ideas have unfortunately overtaken the degree of literacy on economics and the working of markets. As a consequence, very bad ideas are allowed to permeate and frame the context of policy discussions. In an interview given to the Harvard College Economic Review (HCER) for Fall 2006, prof. Larry summers offers this advise to students wondering about the confluence between politics and economics.

Virginia Issues Apology for Slavery

Discussions on the collective effects of slavery on the descendants of the enslaved and the extermination of the indigenous American populations on the determination of America's racial relations remain obscured by accusations of exploitation and apologist explanations that it was justified and justifiable on the basis of the moral code of that time. Here is an example of moral courage that came centuries too late for those who lived and died as slaves but the moral ambiguity is being put to rest. Enslavement of people of all races for whatever reason is inconsistent with high-minded political formations based on expansion of human freedom. The legislators and people of the State of Virginia deserve my congratulations. That state can then seek greatness without hypocrisy.

Quote of the Day

"There is no nonsense so errant that it cannot be made the creed of the vast majority by governmental action". Bertrand Russell

Ken Livingstone Understands Applied Economics

Apart from the proven contribution to global warming, another externality that results from increasing use of automobiles is that of road congestion in many mega cities. So who would be best placed to answer the question that Ken Livingstone, the Mayor of the City of London who introduced what was an unpopular measure in the apt name of the congestion charge. at the point of its introduction, there was widespread skepticism about its effectiveness and indeed some cynics simply stated that it was a measure meant to merely raise more revenue.

Writing in a blog entry in the Guardian newspaper, Ken Livingstone responds to the major criticisms that the initiative has encountered since its introduction in 2003. Among the successes of the Congestion charging initiative was that the number of automobiles going into the metropolis reduced by the number of vehicles going into the city by 70,000 in 2006 but also a concomitant expansion in the number of cyclists by n expansion in the number of cyclists into the capital's major roads by 72%. pessimists had forecast that shopping in the city would be reduced due to the charges and yet London outperformed the rest of the country in retail sales.

Following the admirable improvements, the mayor is contemplating an expansion into other parts of the city that are faced with road congestion and I will not hedge my bets here. It too will be successful. The moral of the story: intelligent application of economic principles in market design can solve common problems with a high level of efficiency.

The Three Faces of Milton Friedman

That Milton Friedman was the most influential thinker in the profession of economics in the last half of the 20th century is hardly in doubt. Following his demise in November 2006, a large number of obituaries and other tributes were generated and most were not only largely laudatory but extremely deferential in a way that would perhaps have embarrassed the great thinker. His accomplishments were numerous and indeed distinct and this was covered in an earlier post by this blogger who only met his thinking from his publications.

What has been lacking so far is a concise and systematic review of his accomplishments and perhaps faults as a human irrespective of his gigantic intellectual stature. Writing in the New York Review of Books, Paul Krugman has written a very elaborate and more incisive piece than I have encountered since Milton Friedman's demise. Krugman not only writes in style but also analyzes Milton Friedman's intellectual life as an Economist's economist, as a policy entrepreneur and a free market ideologue. For those who believed in the departed man as an absolutely clear thinker without academic or other blemish, this is one piece to read again and again. Krugman is in my view quite dispassionate in the sense that he not only elucidates the elder professor's singular accomplishments, but also states inconsistencies that emerged in proclamations as a public intellectual.

This is a piece to file because it makes me have even higher regard for the minds and intellectual ability of both men even if I detect that they would not agree much on policy prescriptions. Krugman writes with respect for the departed as any decent intellectual should. The subject of economics lives.

Steve Jobs Tests the DRM

Writing this piece on his thoughts on Music, Steve Jobs presents a very clever and valid argument for reviewing the system of Digital rights Management that the most dominant music corporations have imposed on Apple and in turn on buyers of digital music. He argues that the average iPod contains about 3% of music that is encoded with DRM, with the rest being music that is ripped from CDs which are not subjected to that stringent protection requirement. Running a corporation that sells the premier digital music player and has sold 90 million units, he presents really clear data that customers have bought about 22 songs for every iPod sold and yet most of these iPods carry about 1,000 songs each.

The burden of maintaining the FairPlay DRM that Apple developed to protect illegal copying of the music sold through the Itunes site appears to be largely in vain. The rational business case in Steve Jobs’ view (and I agree) is that the Music majors ought to consider a review of the placement of DRM systems on all songs sold online. Again, from the selected data that Steve Jobs presents, this conclusion is altogether irrefutable. Whether the four music majors will be amenable to this is altogether a different matter but the situation suggests that the imposition of DRM at present is a mere technological stunt that does not result in increase sales of music but merely displaces piracy and genuine sales to CDs. It is easy to understand the basic economics behind this behavior. Music buyers appear to prefer by a ratio of ten to one, the format that allows them maximum flexibility in transferring music. Because CDs presently allow for this, DRMs only serve to deflect purchases towards CDs and it may well be the reason why hackers have not tried enough to crack the FairPlay DRM system that Apple has put together at what I surmise is considerable cost.

With such elaborate data and much more at his disposal, why did it take Steve Jobs’ this much time to figure this out? Is it perhaps because it appears now that the iPods market dominance is momentarily unassailable? Cynicism aside, the economics of the case has been argued fairly cogently and the four majors must review the data and move towards making the expensive technological stunt that is DRM redundant.

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