Mon, 29 Sep 2003

Trust

I got my eyes opened by two young Turks. Well, no, not Turks, actually Indians: Sumit and Srikant. I was consulting for their employer in Mumbai several years ago. They needed an email server with more oomph than their existing one. In ten days, we designed, procured, and set up a replacement cluster of servers.

The evening I was to leave, they spoke to me of trust, and how, after working with me, they trusted me. I was somewhat nonplussed. "Of course I should be trusted -- I am a highly-paid and experienced professional." No, they said, in India it works the other way around: first you do business with someone, then you learn to trust him.

A lack of trust makes it hard to do business. If you don't trust someone, you have to set up some mechanism for resolving the trust. For example, when Sumit was checking me into the Leela (a five+ star hotel), I noticed that he had to pay a deposit in cash in addition to paying with a credit card. I didn't understand it at my arrival, but I understood it at my departure.

By the way, you should know that any credit card charge can be disputed. You simply tell the bank that you refuse to pay that particular charge, and they will take it off your bill. You have three months in which to do this. The company that generated the charge must then provide proof that you authorized the charge, that the items were as represented, that you actually received them, etc.

Transaction cost is the cost of making a business deal. For example, the time spent weighing one deal against another is the transaction cost. Your time spent going to the store, standing in front of the display, considering the value of a purchase, standing in line at the register, and returning home, are all part of the transaction cost of shopping.

A lack of trust adds to the transaction cost. Instead of buying something sight-unseen, you have to verify that you are actually getting what you are paying for. People do this for large purchases, e.g. by walking through a house, and paying for a professional inspection of the house. That's because the value of the transaction greatly outweighs those transaction costs.

A culture, or society, where businessmen cannot be trusted, is an economically-inefficient society.

Posted [17:44] [Filed in: economics] [permalink] [Google for the title] [digg this]
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Sun, 28 Sep 2003

The Sooner Subsidies Go, the Better

I have to disagree with Steven Den Beste. I got most of the way through his article on farm subsidies, nodding my head, saying "yes"... "yes"... "yes".... Then I got to where he said that it would not be wise to terminate subsidies and quotas immediately. We should immediately abolish subsidies and quotas for the very same reason that you should stop hitting yourself with a hammer. The pain doesn't go away immediately, but the healing starts right away, and you stop doing damage to yourself.

Subsidies always go to the politically powerful, and occur at the expense of everybody else. Does your legislator always do what you want him to do? If not, then you are not politically powerful, and you are one of the victims of subsidies, tariffs, and quotas. Demand that they be ceased immediately.

Ken Markley comments. Whether it's more or less desirable to eliminate subsidies, it just ain't gonna happen quickly.

Posted [15:53] [Filed in: economics] [permalink] [Google for the title] [digg this]
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Thu, 25 Sep 2003

The WTO in Cancun

Astute observers will have noted that the WTO talks in Cancun led to nothing (it was in all the papers). This is bad, of course. Increases in the freedom of trade are always good. In this case, they should have worked harder to come to an agreement. The issues that both sides want are worthy issues, and both sides should have given to get.

Let's look at what the third-world countries wanted: reduction or elimination of agricultural subsidies. Competing on a level playing field is all very well and good a first-world notion. But when the first-world pays farmers to grow food, that makes it very hard for anyone not paid to grow food to sell into that market. Quite clearly, this is neither free nor fair trade.

Let's look at what the first-world countries wanted: the four Singapore issues. These are: freedom to invest (no limits on foreign ownership), transparency of government procurement (no cronyism), free competition (no favoring of local companies over foreign companies), and trade facilitation (not imposing undue barriers to trade).

What makes this whole thing so ridiculous is that there is nothing to "give" here. All of these policies hurt consumers in the country that enacts them. They are all distortions of the free market. Agricultural subsidies are bad because they encourage malinvestment. Milk prices are artificially made higher. Farmers are rewarded for having more cows, so they build mega-farms, with 500-1000 cows. Who pays for this? Consumers.

Limits on investment are similarly self-destructive. Some countries limit the amount of capital that can come into their country from abroad. WHY?? Capital from abroad gets spent locally. That's the purpose of capital -- to be spent in the pursuit of returns to capital. Why any country wouldn't want foreigners to spend money in their country, I can't understand.

Transparency of government procurement should seem to be a no-brainer. Unfortunately, there are a lot of corrupt governments out there which prefer to simply hand out contracts for this and for that to their buddies. Government contracts are used to pay back campaign contributions. This really isn't a trade issue, and the citizens of each country should be fighting for this issue.

Free competition is necessary for the free market to do its magic. Favoring one company over another through the force of law is just a hidden subsidy. Subsidies are always bad, because they force one party which is politically less powerful to pay for things desired by the politically more powerful. This is a fairness issue.

Trade facilitation is simply ensuring that government regulations related to import, and shipping, do not impose an undue burden on countries seeking to do trade. This is the same principle as free competition, only under another name.

All of these issues don't need to be part of world trade pacts. Each of them may be adopted unilaterally to the benefit of each country. The reason they are not is because government allowed to be corrupt by its citizens allowing one kind of favoritism or another. Usually these citizens have been confused into adopting bad economic policies.

Now that you know what is good economics, you're not going to put up with that, are you? I thought not.

Posted [01:24] [Filed in: economics] [permalink] [Google for the title] [digg this]
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The WTO in Cancun

Astute observers will have noted that the WTO talks in Cancun led to nothing (it was in all the papers). This is bad, of course. Increases in the freedom of trade are always good. In this case, they should have worked harder to come to an agreement. The issues that both sides want are worthy issues, and both sides should have given to get.

Let's look at what the third-world countries wanted: reduction or elimination of agricultural subsidies. Competing on a level playing field is all very well and good a first-world notion. But when the first-world pays farmers to grow food, that makes it very hard for anyone not paid to grow food to sell into that market. Quite clearly, this is neither free nor fair trade.

Let's look at what the first-world countries wanted: the four Singapore issues. These are: freedom to invest (no limits on foreign ownership), transparency of government procurement (no cronyism), free competition (no favoring of local companies over foreign companies), and trade facilitation (not imposing undue barriers to trade).

What makes this whole thing so ridiculous is that there is nothing to "give" here. All of these policies hurt consumers in the country that enacts them. They are all distortions of the free market. Agricultural subsidies are bad because they encourage malinvestment. Milk prices are artificially made higher. Farmers are rewarded for having more cows, so they build mega-farms, with 500-1000 cows. Who pays for this? Consumers.

Limits on investment are similarly self-destructive. Some countries limit the amount of capital that can come into their country from abroad. WHY?? Capital from abroad gets spent locally. That's the purpose of capital -- to be spent in the pursuit of returns to capital. Why any country wouldn't want foreigners to spend money in their country, I can't understand.

Transparency of government procurement should seem to be a no-brainer. Unfortunately, there are a lot of corrupt governments out there which prefer to simply hand out contracts for this and for that to their buddies. Government contracts are used to pay back campaign contributions. This really isn't a trade issue, and the citizens of each country should be fighting for this issue.

Free competition is necessary for the free market to do its magic. Favoring one company over another through the force of law is just a hidden subsidy. Subsidies are always bad, because they force one party which is politically less powerful to pay for things desired by the politically more powerful. This is a fairness issue.

Trade facilitation is simply ensuring that government regulations related to import, and shipping, do not impose an undue burden on countries seeking to do trade. This is the same principle as free competition, only under another name.

All of these issues don't need to be part of world trade pacts. Each of them may be adopted unilaterally to the benefit of each country. The reason they are not is because government allowed to be corrupt by its citizens allowing one kind of favoritism or another. Usually these citizens have been confused into adopting bad economic policies.

Now that you know what is good economics, you're not going to put up with that, are you? I thought not.

Posted [01:24] [Filed in: economics] [permalink] [Google for the title] [digg this]
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Sun, 21 Sep 2003

Ride starting Sun Sep 21 14:36:56 2003

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Tue, 09 Sep 2003

The Non-problem of Public Goods

Many economics textbooks will talk about the problem of provisioning public goods. A public good is one which cannot be provided to one without being provided to all. Clean air is considered by many to be a public good. Public parks are also a public good. The thought is that the market cannot supply public goods, because there is no way to charge a price for the provisioning of the good.

Balderdash.

The classic example, used by many to justify government intervention in the economy, are lighthouses. If the light is to be provided to one ship, it must be provided to all. And yet ... in England many lighthouses were constructed and operated using private funds. The owners of harbor properties formed a voluntary association with the purpose of improving the harbor. This group could build jetties, breakwaters, and yes, lighthouses. As a group, they benefit from ship's ability to find and successfully navigate its way into the harbor.

Another example is that of freely copyable software, what we now call Open Source. The thought is that no one would supply open source software because there is no way to monopolize it -- to gain a monopoly price by restricting redistribution. Amazingly, there exist people who still think this is the case, and not just textbook authors who haven't revised their work recently.

So where is the problem? The problem is not strictly in public goods, but instead in a different but overlapping group of goods. I don't know if this group has been named or not. This group has the characteristic that the private gain from its provision is less than the private cost, and yet the public gain is greater than the public cost. Both of these terms have to apply. If the private gain is greater than the private cost, the public need not get involved. If the public cost is greater than the public gain, then public should not get involved.

Open source software, which is technically a public good, does not fall into this category. Private parties produce open source software because they receive or perceive a gain in excess of their costs. The Angry Economist is one of these parties, as a simple web search will show you.

If anybody knows of a name for this category of goods (and services; I get tired of saying "goods and services" all the time), I'd like to hear it.

Posted [10:37] [Filed in: economics] [permalink] [Google for the title] [digg this]
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