Monday Oct 12, 2009

Oliver Williamson Wins the Nobel Prize in Economics

Some 5 years ago, I started my first entry on blogs.sun.com with a brief note quoting from an essay by Oliver Williamson about strategizing vs. economizing. (That essay was published in his book, The Mechanisms of Governance.)

It is most fitting that I should end my series of blog entries on blogs.sun.com with something about professor Williamson, too.

Today (October 12, 2009), through a series of accidents starting with a doctor's visit in Alameda, I was actually passing through UC Berkeley when my wife called me with the news of professor Williamson winning the 2009 Nobel Prize in Economics. I was luck because I was next to the Haas business school building and I had a real chance to drop by professor Williamson's office and to congratulate him in person. What a great honor, and what a great and most appropriate choice for a recipient of this prestigious prize in economics!

Thursday Aug 06, 2009

Clunkers and Financial Institutions

Cash sent to financial institutions corrects ("fills" gaps in) balance sheets to improve credit-worthiness and loan-giving capabilities. "Cash for Clunkers" removes depreciated assets prior to their end of life, generates demand and creates economic pull throughout. Small actions at points of leverage can produce much larger effect than much larger actions at other points.  

Monday Jul 27, 2009

Electricity Usage

Reports say 2009 will be the first year since 1945 that electricity usage has had a year-over-year reduction.

Projected percentage change in worlwide electricity usage this year is expected to be -3.5.

This data, whose source is the International Energy Agency (Paris), was published in the August 2009 edition of the Harper's Magazine. The magazine has a famous 1-page Harper's Index of various indicators.

Wednesday Jun 24, 2009

Salaries and Soccer

In The Wall Street Journal sports section, David Biderman writes:

The U.S. upset of Spain in the Confederations Cup on Wednesday isn’t the only soccer shocker. Money paid for Euro-league players can also elicit gasps. Spanish forwards David Villa and Daniel Güiza and midfielder Xabi Alonso cost a combined $60.2 million in transfer fees alone since 2004. By contrast, the 356 players in Major League Soccer, America’s top league, will make a combined $49.7 million in the 2009 season, according to the league’s Web site.

Saturday Feb 28, 2009

The Three Forces of the Long Tail and the Classic Market

Chris Anderson's study of The Long Tail identifies three economic forces that the modern computing technologies, the Internet and the Web have helped unleash: (1) Improvements in tools of production of content and goods. (2) Improvements in tools of distribution. (3) Reductions in search costs through improvements in search technologies. (When we speak of "search technologies," we should understand them to mean any method of search, including the physical search, which is the "classic" search technology.)

These three forces join and orchestrate a move, in the consumption curve, from "hits" to "niches".

The argument is that this increases overall economic value. It does, indeed, for some firms and large numbers of consumers that engage in related "modern" search-and-consume activities on the Net. However, the classic market economy does not improve and will suffer, without a fast enough replacement in all niches and certainly in "hits" which provide the batteries for the classic market. Unless we reformulate the classic consumption game in new innovative ways, through innovations in general logistics of moving people and goods, I remain skpetical whether the replacement rate will be sufficient to outpace the overal reduction in consumption due to the diminishing physical search habits.

Tuesday Dec 02, 2008

Inescapable Facts of Mass and Distance

It is not clear whether Liam Denning was writing prose or an article on supply chain management and global logistics. Good writers lurk everywhere.

I will have to quote his whole article from The Wall Street Journal to make my point.

Ship Ahoy: New World's Supply Chain

By Liam Denning (The Wall Street Journal, December 3rd, 2008)

The world is bumpy.

In the age of globalization, conventional wisdom holds that supply chains prioritize labor-cost arbitrage over mere distance.

Geography, however, could make a comeback. Triple-digit oil provided the first intimation of this. Jeff Rubin, chief economist for CIBC World Markets, estimates $150 crude oil boosted the cost of shipping imports to the U.S. by 11%, costing roughly as much as trade tariffs in the 1970s.

Crude now trades under $50 a barrel, but the crash reflects faltering demand more than rising supply. When demand recovers, oil prices will, too.

Marc Levinson, author of container-shipping history "The Box," suggests the world also is hitting the limits of economies of scale in logistics, citing bottlenecks at ports and congested road and rail networks. These impose costs and delays and, as supply chains have become more complex, more potential points of failure. Initiatives forcing ships to reduce harmful emissions also will weigh on economics.

Innovation could change the equation again. But the ultimate facts of mass and distance are inescapable when it comes to rethinking logistics.

One answer will be shorter, regional supply chains -- a phenomenon observed in changing sources of U.S. imports during the 1970s oil shocks. That ought to have positive implications for exporting economies such as Mexico, while China could suffer.

U.S. workers cheered by the prospect of jobs returning home, however, shouldn't be too jubilant: Globalization and labor arbitrage aren't going away. And rising supply-chain costs mean U.S. workers will pay higher prices for the goods they buy.

Thursday Nov 20, 2008

In Need of an Economic Strategy

Michael Porter, the business strategy guru from Harvard, writes about "Why America Needs an Economic Strategy".

His essay deserves a careful read by business and political leaders in the U.S.


Tuesday Nov 18, 2008

Generation Graphics

This graphic display of U.S. housing starts, based on data from the U.S. Census Bureau and published by The Wall Street Journal, grabbed my attention.

Real Estate prices are actually a complex non-linear function of interest rates, housing starts, employment, and existing re-sale inventory — and yes, location.

Monday Sep 22, 2008

Profit and Leverage

Jon Hilsenrath, Damian Paletta and Aaron Lucchetti, "Goldman, Morgan Scrap Wall Street Model: End of Traditional Investment Banking," The Wall Street Journal, Sept. 22, 2008:

The most fundamental problem is how to generate profit growth in a world that no longer tolerates high leverage.

Saturday Sep 20, 2008

Strong Positive Feedback and Tippy Markets

In network economies, the number of compatible users (or network end points) determine the value of the network. In such economies, one may experience strong negative or positive feedback. When the number of compatible users goes down, the network will eventually suffer a "vicious" cycle of collapse. On the other hand, when the number of compatible users goes up, the network will enjoy a "virtuous" growth cycle.

In Web 2.0: A Strategy Guide — Business thinking and strategies behind successful Web 2.0 implementations, Amy Shuen writes:

When two or more companies are in a competitive race for market share where there is strong positive feedback due to network effects, only one company emerges as the winner. (Economists call this market tippy because it can tip in favor of one company or the other.) Strong positive feedback can lead to a winner-take-all market dominated by a single firm or technology.


Monday Sep 15, 2008

Avoiding "Moral" Hazard

In a credit crisis, the "lender of last" will weigh options, now having to balance the desire to provide liquidity versus its desire to ensure market dynamics ("Credit Crisis Strains Government's Options," WSJ, Sept. 12, 2008):

Officials are also acutely aware of the problem of "moral hazard." Bailing out too many firms, the reasoning goes, would encourage more risk taking in the future. That makes officials reluctant to be seen as rescuing another institution. The Fed made a $29 billion loan to help J.P. Morgan take over Bear Stearns. It's not clear that it would be willing to do that for another firm.

Treasury Secretary Henry Paulson has said that institutions must be allowed to fail and that markets can't expect the government to lend money or support every time there's a crisis. "For market discipline to constrain risk effectively, financial institutions must be allowed to fail," Mr. Paulson said in a speech in July.


Thursday Aug 07, 2008

A Little Big Grain of Truth

There's a little big grain of truth in what Daniel Altman says ("Fluid Dynamics and Alternative Fuels"), based on macro-energy balances which one can imagine grounded in some solid macro-economic and micro-economic analysis.

Tuesday Aug 05, 2008

The end of the deep freeze

After the two great wars (WWI and WWII) and particularly after the first one, the world went into a deep freeze over international trade. Whole sections of the world were forcefully left out of its active commercial core. Political storms divided natural trade partners and put their commerce into a deep freeze. In the new millennium, those affected have fully woken up to the grander design of the world trade. So, now, we can read the following in Financial Times ("Sino-India trade wave captures banks' attention," August 4, 2008), as a normal course of events:

Sino-Indian trade last year climbed by 56 per cent to $38.7bn, according to Chinese data, and could reach $60bn as early as this year rather than in 2010, as was previously expected.

This is still pittance compared to the major bi-party trade figures in the rest of the world but looking at the growth rate will tell you where we are heading. Will the world commercial core next shift to where it was 800 years ago?

Sunday Feb 24, 2008

Microsoft and Open Source Software

As the news of Microsoft's moves last week unfolds, strategists might find it useful to review "Dynamic Mixed Duopoly: A Model Motivated by Linux vs. Windows," by Ramon Casadesus-Masanell and Pankaj Ghemawat of Harvard Business School.

Working Knowledge carries an interview with the authors.

Tuesday Nov 13, 2007

Wars' Cost

Josh White of The Washington Post summarizes the findings of "The Hidden Costs of the Iraq War," a report issued by the Democratic staff of U.S. Congress's Joint Economic Committee. I do not believe the cost analysis takes account of the immeasurable human toll involved.

If, instead of a dogged focus on imperial goals powered by fear, people demanded that this money be spent, prudently, on making U.S. economy more competitive, i.e. if they demanded that government-driven investments be focused on people, institutions, facilities and technologies that help people get on with their lives, work and play, the U.S. would not be facing the economic problems it is facing now and will be in a much better economic, political and social position globally.

 

Monday Sep 17, 2007

UK Bank Run or the Advantage of Reading Two Papers

I subscribe to two papers that are delivered every morning at my doorstep: The Wall Street Journal and Financial Times

For three days now, Financial Times has carried stories and pictures of a bank run in the UK, involving Northern Rock, a financial institution focused on savings and loans geared to the mortgage market. (Some have argued that if there's only a single bank run, we do not have a bank run. However, financial crisis have their own way of diffusing to neighbors.) This morning, FT carries, above the fold, a 1/4 page picture of a crowd waiting to withdraw their savings from a Northern Rock branch. Cambridge - Customers of Northern Rock waiting patiently to withdraw their savings.

No two industrial economies or countries are as intertwined as the UK and the US. Yet, if you read The Wall Street Journal this morning, you would hardly notice anything going amiss in the UK. On the front page, the news of the bank run is reflected only in a two-sentence paragraph falling on the fold, making it hardly visible, with a jump to page 3 of section C ("Money & Investing"), a section which bills an educational piece on yield curves on top of its own fold. On page C3, two short columns summarize the least salient parts of story, with no mention of a bank run.

I should end this by noting that the electronic version of FT, accessible here in California, has no images like the ones in the print edition on its front "page" today. However, one can find relevant images on Flickr -- like the one I've posted here.


Wednesday Aug 29, 2007

Diffusion of Financial Crisis among Economic Neighbors

In the last several months, as the credit crisis has rippled from the U.S. to Europe and back, I'm reminder of other historical examples:

Princes, abbots, bishops, even the Holy Roman Emperor debased the subsidiary coinage used in daily transactions (but not gold and silver coin of large denominations) by raising the denomination of existing monies, substituting baser for good metal, or reducing its weight, in order to extract more seignorage in the absence of effective tax systems and capital markets--this to prepare for the Thirty Years' War, which broke out in 1618. Debasement was limited at first to one's own territory. It was then found that one could do better by taking bad coins across the border of neighboring principalities and exchanging them for good with ignorant common people, bringing back the good coins and debasing them again. The territorial unit on which the original injury had been inflicted would debase its own coins in defense and turn to other neighbors to make good its losses and build its war chest. More and more mints were established. Debasement accelerated in hyper-fashion until a halt was called after the subsidiary coins became practically worthless, and children played with them in the street, much as recounted in Leo Tolstoy's short story, "Ivan the Fool."

Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crisis, 4th edition, p. 121, John Wiley and Sons, Inc., New York (2000) 

 

Tuesday Aug 21, 2007

Car Insurance and Game Theory

Car insurance companies seem to use a lot of game theory, and "safe guards,"  to set up the process of assessment and pay-backs in cases of actual accidents such that they can prevent many kinds of fraud and protect their assets and revenue stream. Of course, the process is not optimized for delivering any kind of justice but only to ensure that "rational" decision makers make decisions that are least damaging to the revenue accrued to the insurance companies as insurance bets are "auctioned" by the various parties involved. (The cooperative insurance models of 600 years ago are certainly not operative in the 20th and 21st centuries.)

Last week, my C230 Kompressor  was rear-ended by a 17-year-old who, apparently, is not listed as a named driver on his parents' insurance. While his parents' insurance adjuster is "investigating" whether he was driving his parents' Jeep Wrangler with their permission, I had to deal with my own lack of transportation, rent a car,  find a suitable body shop, have my car towed to that body shop, call the two adjusters multiple times, follow up on the work of the assessor at the body shop, and do all this, despite the fact that I carry a "comprehensive" insurance on my car, and despite the fact that I've been rear-ended by a car carrying a 17 and a 16 year-old. 

Finally, this  afternoon I was told that the car is totaled. Tomorrow, I will have to call my adjuster again to discover what my "comprehensive" coverage, which I've maintained since I bought the car, really means. The assessor says if I decide to fix the car, there will be a deduction equal to salvage price of the car, which is an encouragement to not fixt the car although its value to me is higher than the "bluebook" value. (The assessor might have been unaware of my comprehensive coverage, which I myself discovered after having read the fine print in my car insurance policy.)

It is funny how the set up of these various transaction limits, force "rational" agents to make choices that are irrational to them, from a judicial point of view, but that which are the only choices left from an "economic" point of view, and which end up protecting the insurance companies' assets and revenue stream from gaming by potential fraud.

Insurance at its bottom is not about protection against unpleasant accidents. Instead, it is merely about creating a new economics at the time of accident which force certain choices on the parties.

Saturday Aug 11, 2007

Lender of Last Resort

Charles P. Kindleberger describes the concept of "lender of last resort," in great detail in his Manias, Panics, and Crashes: A History of Financial Crisis

As of late last week, central banks in the EU, the US, Japan and Canada have begun claiming their mantle as lender of last resort within their economies, pumping lubricating liquidity into financial markets (at least some $120B of it) to put a break on an impending credit crunch. The coming weeks will reveal more. (John Authers speaks about it here. He calls it "very dangerous times" and speaks of a potential "melt-down" and hopes that this injection of liquidity can push back the tide of "bad news.")

Wednesday Jun 13, 2007

Money Supply

Despite the recent correction to the falling prices and rising yields of U.S. treasuries, I've been wondering how the Federal Reserve might react in the coming months as the bond market remains jittery. The talk to beat inflation was tough when the new chair took his place. However, if money is tightened to reduce inflation, interest rates will have to rise even more, furthering the slump in the housing market already suffering from the recent subprime melt-down. This course of action will lead to serious unhappiness among those owning property. If the Fed decides on merely talking about beating the inflation while letting money loose, interest rates will remain less volatile and inflation will rise but perhaps at a slower rate than would cause a shock. If I were to bet, I would bet that the Fed will choose the latter coure of action. It is the politically "prudent" course although many who earn wages and have little property to own may suffer more than others.
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