Friday Feb 16, 2007

Driving To Work

Consider the table below, originally published by The Wall Street Journal.

It shows the growth in traffic costs (fuel and lost personal time) in various urban areas in the U.S. from 1983 to 2003.  The actual and aggregate "cost" of a transportation system that relies, primarily, on individuals driving themselves to places goes well beyond that of fuel and lost personal time. One must also include other costs such as health care, insurance, repairs, etc., which arise when people have no reliable public transportation choice and have to drive themselves to work and other places over long distances.

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Table from the WSJ.

When active producers in an economy spend large parts of their time and resources driving back and forth to work, they are contributing to the aggregate transaction costs of that economy, making it less "competitive" than economies that make better use of time and resources ("Bush Plays Traffic Cup in Budget Request," WSJ, Feb. 5, 2007). Witness, as examples, public transportation systems in Tokyo and Berlin.

Travel congestion is "increasingly troubling," Transportation Secretary Mary Peters said in an interview. "It's a cost to business and probably affects our ability to be competitive on the global market. But it's also something that just drives people crazy."

It would be misleading to think that work-from-home in the Internet age will solve the problem. A quick analysis of the social life of information would make it clear that work from home has its own significant transaction costs for corporations. So, while by working from home we reduce some aggregate transaction costs, we add others.

Monday Jan 08, 2007

Shifting Transaction Costs

Regulatory measures can impose, shift or reduce transaction costs for business operations.

For example, the Committee on Foreign Investment in the U.S. (Cfius) has recently moved to impose security requirements on the proposed Nokia Siemens venture.

It is not clear whether Cfius is going beyond its mandate by imposing such requirements. "The process has become a tool for Cfius to impose security requirements on foreign companies, while government lacks the legal authority to impose them on U.S. companies," a U.S. business lawyer David Marchick told Financial Times. (Reuters cites the FT report in its own story on the same subject.) 

Saturday Dec 23, 2006

A Transaction Cost Economics View of the Bullwhip Effect

I'm posting another one of my papers form the Haas years: "A Transaction Cost Economics View of the Bullwhip Effect." It was written in May of 2004. It does need another good round of editting. So, I might edit and repost it at a later time.

In short, this paper gives a TCE assessment of the bullwhip effect observed in supply chain systems. It was written as part of an independent study with professor Oliver Williamson, who was kind enough to review the work and provide some very valuable suggestions. It was an honor to learn a few things about TCE from him, and of courses, errors in this paper, including the typos and techincal ones, are all of my own.

Monday Dec 18, 2006

Securing Property Rights

In cultured societies1, the state secures personal property against wanton takeover. Such protection encourages personal investment in productive social activity.

In a sense, private property becomes, and indeed is, sacred.

Nowhere is this more clear than the severe, albeit varying punishment vetted against thieves in various cultures and societies throughout history.

For example, consider the law in the U.S. that called for the execution of a man who stole the horse of another. Presumably, stealing a horse could be tantamount to stealing another's livelihood if not his or her life. As another example, if some score of  conditions hold, a thief of a personal property might lose a limb--starting with a piece of a finger--according to the sharia law. One of those score of hard-to-meet conditions that must exist for this particular law to apply involves a lack of a survival need to steal. So, the punishment may apply to a Wall Street magnet who has provenly and intentionally stolen from an old lady's pension or some orphans' trust, wrecking their lives as a consequence, but will not apply to a hungry beggar who takes an apple. 

Furthermore, and beyond the proofs in stipulated punishments, we have the proof in taboos against taking what belongs to others. These taboos run deep. For example, consider the emphasis, in both Jewish and Islamic law, regarding payment of debt as a religious obligation. Most reasonable people experience the relevant acculturation and live by these taboos and commendations.

Without the protection of private property, no one can be expected to give of his own or contribute anything for she or he will receive nothing of worth in return. There would be no incentive to contribute anything of worth without the protection of private property and rights in what is of worth. The history of the artificial beliefs in the sanctity of communal property extending to all things worth owning makes it quite clear that when incentives of private ownership disappear, people stop contributing willingly.

However, all protection of private and personal "property" has come at a price. States levy taxes on assets presumably to compensate themselves for cost of securing the conditions for ownership of such assets. The owners pay taxes and return something to the society that harbored their ownership rights. There are similar limits in other cases.

While IP and copyrights have been treated by some as private property, the protections granted to them had a different purpose. It was not an eternal protection but simply a safeguard for a limited time in order to grant the creative forces some security so that they may achieve and earn a return on the novelty they had created. Indefinite or long-term protection would create other problems such as slow propagation of novel ideas and innovations, not to mention the cost of enforcing such "rights." However, there were limits imposed on the duration of such protection in order to return the ideas to the mix of the community that had helped foster them. 

Lawrence Lessig has written enough about this topic, and today, in The Wall Street Journal, we read how sums are invested for the very protection of copyrights. ("Copyright Tool Will Scan Web for Violations," WSJ, December 18, 2006, Page B1.)

When a society pays more for securing what only needs limited protection, it increases its cumulative transaction costs at a time when better, lower-cost, alternatives exist for safeguarding what needs protecting. (This forumla also holds with aggressive wars as a means to provide "security" or with dubious prisons and gulags as a means to provide "justice." These techniques remind us of the analogy of a hammer used to kill a fly. Indeed, they are far worse.)

To the extent creative commons get a chance to grow beyond a certain threshold, we are in a position to see a more free culture. Cultural production means creating new cultural products against and upon what history has handed to us. To the extent that history can be frozen in a particular era by some few owners of its cultural products, we stand to suffer because we lose our flexibility as a cultured community to respond to the changes that go on around us.

Notes

1. The phrase "cultured societies" reads like an oxymoron. No society can exist in the long run without a culture to sustain it. Perhaps, I should have said in "Sustainable societies". Then again, we aree dealing with a bit of a tautology here. Without culture a society cannot be sustained, and no society is sustainable without culture.

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