Archive for category Opinion

Can cancer teach sociologists about cohesion?

Normal (non-cancerous) cells have specific jobs to do. Brain cells do brainy things, heart cells bungee-jump all day, skin cells enjoy a good suntan (good job if you can get it) while kidney and liver cells strain toxins and bladder cells hold the strained nasty stuff  (someone’s gotta do it). Normally they all do different jobs, but when they turn cancerous, they they devolve and throw all of that specialization aside. They become anti-social, do not perform the task specified in the blueprints of DNA, but rebel and go it alone. They try to evade the monitoring mechanisms that would shut them down and attract blood vessels to themselves to avail of the easy resources. Cancer cells give up being a high level technical worker in the body and become instead selfish in the lowest form of life – all they want to do all day is eat, excrete, reproduce, act disorderly, crowd out others, use up resources (see more on this at the Exploratorium).

Many things can cause cancer: radiation, chemicals, viruses, etc. Viewed this way, cancer is not really a disease but a normal survival reaction of cells in the body to stress factors. Read the rest of this entry »

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Next time talk is about “pride” and “professionalism”, think…

“Amateurish” has become a byword for low quality and professionalism has all-positive connotations but that perception is far removed from reality. According to a study in American Journal of Sociology “professionalism is a sort of introspective egoism. Professionalism results in the production of certain definite and illogical idiosyncrasies. The professional is not conscious of the outcome of this slow process, but to the outside observer the deformation is painfully obvious. More professional deformation will produce less productive labour” (Langerock, 1915). (love reading old, sober research for some perspective). Even jobs producing nothing but economic waste (ranging from professional soldiers to advertising exec, redundant middlemen to spin-doctors, paper-shuffling bureaucrats to speculative dealers of derivatives and technical analysts in finance) will find solace in their “professionalism” (and as Tolstoy said, every man can find good reasons to justify the way in which he made his living).

So, why the drive to professional classes?

Your calling awaits – an example of the effort to recruit to one of the learned professions.

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Competition or cooperation

Elinor Ostrom has received a Nobel prize in 2009 for her work showing that a basic implicit assumption of economists (that we work as individuals, never as a collective) is false. She has found successful, mutual and reciprocal schemes such as forests in Nepal, irrigation systems in Spain, villages in Switzerland and Japan, and fisheries in Maine and Indonesia where people had developed ways of regulating their use of common resources without resorting to either private property rights or government intervention (Gittins, 2012). Not that many economists would have known her work. That idea is just too crazy to raise in otherwise “intelligent” discussions.

As it turns out, this thought has already been stumbled upon, researched and proven as it also applies to another struggle for resources, that between species, and the same conclusion has been reached. For example:

“The animal species, in which individual struggle has been reduced to its narrowest limits, and the practice of mutual aid has attained the greatest development, are invariably the most numerous, the most prosperous, and the most open to further progress.” (Peter Kropotkin, 1902).

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The misnomer of European Union

I have been wondering for many years what the driving force about the great experiment called EU was. All the effort to drag the laggards up to the standards of Germany and its neighbours, all that desire to unite… The markets bringing specialisation, economies of scale  are significant economic forces. ”Cold-shower” competitive pressures on the small domestic producers, aided by the price transparency of the single currency will please the Chicago-school devotees. Having an international currency eliminates risks and costs due to exchange of floating foreign currencies. Seigniorage (to the extent Euro becomes a reserve currency) is certainly attractive, why should the whole benefit go to the US.  But none of this has ever seemed enough for the great effort involved, certainly not to get this flawed, ill-fitting, monetary-but-not-fiscal-union in a non-optimal currency zone (where the Euro is cheap for Germany and expensive for Greece).

Well, the picture seems to have gelled in 2012.

First, the obvious: business loves more people in their markets, that’s an easy way to grow. Business also loves a reliable supply of labor asking for no conditions to speak of and low wages. EU now has an inexhaustible supply of labour ranging from 1 euro/hour for manual labour/tradies to about 2 euros for professionals. This need has always existed, especially whenever the economies were expanding, just think back to the voluntary travailleurs étrangers/gastarbeiterprogramm of the post WWII period, or the fremdarbeiter system under the Nazis that includes 15 million abductions few speak about.

Guest workers arriving to the Wirtschaftswunder, Germany’s economic miracle

 

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Strategic positioning of Apple in the post-PC markets

Introduction

1.1 Background

The post-PC market is witnessing rapid development in technologies and market growth. Apple Inc (Apple) has managed to take advantage of these changes better than any other competitor. This report will examine the strategies that underlie the rapid rise of a small, struggling PC competitor to the world’s most valuable tech company.

1.2 Scope:

The report examines Apple’s global functional and business strategies and their fit, the state of the competition and, using Porter’s framework, the various forces affecting Apple’s profitability. The report is based on Apple’s annual report, industry specific academic studies, the latest expert technology commentary and strategic theory as it applies to high-tech industries.

 

1.3 Plan:

After a quick historical background, the discussion outlines Apple’s currently very favourable competitive position. After this, Apple’s business strategies are listed, followed by the functional strategies that underlie it. The congruence between those two levels, in light of Apple’s market positioning, is noted. The report discusses how forces that shape the market affect Apple using Porter’s Five Forces framework. Finally, turning to the future, we examine the sustainability of Apple’s competitive advantages and the future threats to profitability. The report concludes with recommendations to improve the strategic positioning of the company, ordered from the short term to long term strategy.

Discussion

 

2.1 Apple’s run to the top

In the fifteen years between 1996 and 2011, Apple has gone from a quirky, small PC competitor near bankruptcy to the world’s most valuable company (Menn & Crooks, 2011). This remarkable change of fortunes required daring strategies, intuitive innovation and well-executed commercialisation but also for the established players to miss new market opportunities and the changes in demand in their markets. Apple’s competition is not alone in these mistakes: the Australian car industry missing the shift of demand towards small cars, Australian retail ignoring online shopping, Prodigy ignoring AOL and Blockbuster ignoring Netflix at the dawn of the internet era, or Kodak missing the digital photography revolution completely (The Age b, 2012) are just some examples where the combination of inattentiveness to the customer and the desire to keep playing on the old strengths can bring the demise of once powerful competitors. Microsoft, in direct competition with Apple and the dominant IT player in the 90s, was regularly a laggard in game-changing technologies such as the internet. In addition Microsoft, concentrating on its large corporate clients, missed the change in demand as the consumer market moved to the mass market phase and the early majority began to demand easy access to digital content and more user-friendly consumer devices “that just work”. At the same time the music industry was wary of new, purely digital distribution channels, and Sony was reluctant to develop a competent digital version of its Walkman, leaving a perfect opening for the iPod (The Age b, 2012).

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The effectiveness of planned strategy

Introduction

This essay evaluates the often held sentiment that ‘strategy is the outcome of a formal strategic planning process from top management’, often followed by ‘therefore, it has limited value in providing the organisation with a competitive advantage.’ To this end, the essay first examines formal strategic planning processes of top management as source of strategic direction for the organisation. The extent to which this connection exists, the essay examines the effectiveness the chosen strategy will contribute to providing the organisation with a competitive advantage.

In the discussion two sources of strategy are identified and contrasted: top-down, planned strategy and the emergent strategies. By doing this the plurality of sources of strategy is established and contradicts the first statement being evaluated. The second statement is discussed at much more length. Evidence that links strategic planning and increased organisational performance exists, but as the same time, powerful voices also urge businesses to employ strategic management that emphasises emergent strategies more, and strategic planning less. These opinions can be reconciled by recognising that various underlying (firm- and industry-specific) factors strongly influence the effectiveness of the planning process. The essay discusses some human limitations that can render planned strategy less valuable, and the rise of the arguably flawed idea that holds shareholder’s value in highest importance is noted. The essay contends that this idea, coupled with short-term performance pay, attributes to excessive share-price volatility and overall lower long-term profitability.  Finally, it is noted that the value derived from planned strategies also depends on the monitoring and feedback processes.

Discussion

Strategic leadership aims to manage the strategy-making processes, aiming for the creation of strategies that result in higher performance and competitive advantage (Hill & Jones, 2010). One activity that aims to achieve this is the top-down strategic planning process the results of which, if realised, can be called deliberate strategy. Despite careful planning some planned strategies can get derailed by unpredictable change and thus stay unrealised.  At the same time, agents outside top management can contribute to a separate class of strategies called emergent strategies (Hill & Jones, 2010), meaning that while the formal processes of strategic leadership are all about strategy, the relationship doesn’t hold vice versa. The link between top-down strategic planning and actual organisational strategy realised is therefore more tenuous than stated in the statement being evaluated.

Top-down planned strategy formulation is a structured process aimed at finding the best, or (in absence of a clear picture of the counterfactual) at least satisficing strategies, and correcting them as situation changes or as feedback dictates. While the process itself is well-defined, opinions on the effectiveness of the resulting strategies vary. Poister and Streib (2005) have found that strategic planning efforts in municipal governments are credited with bringing about improvements in both organizational capacity and performance.  Song, Im, Hans van der & Song (2011) find that in smaller organisations that spend more on R&D strategic planning does improve organisational performance. Mintzberg on the other hand is critical of strategic planning and would rather emphasise decentralised decision making, informal learning and personal vision (Mintzberg, 1994). These seemingly opposing views can be reconciled if we recognise that the situations studied are far from exhaustive, i.e. the researchers have significantly limited the population of organisations researched, and therefore the conclusions are limited to this population also. The study by Poister and Streib included municipal governments only and doesn’t claim optimum solutions, only a positive contribution. The study of Song et al stipulate conditions of size and R&D spend. How much to plan is a nuanced question, and the answer to that will depend on a large number of firm-specific factors.

Mintzberg’s criticism of strategic planning, despite being a generalisation requiring exceptions, is important to note because having considered the general business environment, its findings are relevant to so many of today’s organisations. It is hard to argue when Mintzberg contends that the predominant commercial environment (of globalisation and rapid changes in the macroenvironment) businesses operate in today create an unfavourable climate for the slower rational, planned approach. Bovaird confirms this with a more theoretical approach, which notes that in this global changing environment most organisations of today evolved to be complex, adaptive open systems with at least somewhat decentralised decision-making, and in such circumstances behaviours and strategies owed at least as much to emergent complex interactions within the policy system as to the cognitive processes occurring in any one agency (Bovaird, 2008). This environment places significant limits on the well-defined, rational top-down approach, in danger of appearing as narrow, over-elaborate and out-of-touch analysis into strategy within a complex systems whose interactions are only partially understood.  In such situations top level management should swap their strategic planning to “strategic shaping” and “meta-planning” role (Bovaird, 2008). Mintzberg and Bovaird make it clear that apart from firm-specific factors, the bigger situation in which strategic planning is applied in is an important factor in determining the effectiveness of that planning. While top-down approach is well suited to quantitative data and well-structured problems, businesses often face uncertain or unpredictable situations, where the complexities involved mean that individual insight and serendipity (resulting in the emergent strategy) play a much larger part.

Other criticisms that center on the limitations of humans engaged in strategic planning include the potentially powerful effect of cognitive biases such as the availability error and the prior hypothesis bias (Hill & Jones, 2010). As well as distorting reasoning, human limitations can also seriously limit the range of strategies considered. Ruth Benedict wrote in her seminal book that cultures “might change far more radically than any human authority has ever had the will or imagination to change them, and be still completely workable” (Benedict, 2005 p.36). In other words, she is warning that humans can fall into fixed mental modes when dealing with complex ideas. This observation about culture can be directly applied to the area of strategy planning as well. Despite techniques aiming to counter weaknesses in the strategic planning process such as the outside view and devil’s advocacy, these limitations together can greatly reduce the effectiveness of rational strategic processes.

In any principal-agent relationship the difficulty in lining up interests is another subtle factor that can affect the effectiveness of top-down strategy aimed at the long-term. Peter Drucker’s original insight concentrated on the basics and encouraged a holistic approach when stating that the only valid purpose of a firm is to create a customer (meaning that the shareholder value will take care of itself) (Drucker, 1954), but by 1970 Milton Friedman argued that the only responsibility is to increase profits (Friedman, 1970). A few years later finance professors Jensen and Meckling justified the principal-agent abstraction and argued with more theoretical foundation for the idea that the singular goal of a company should be to maximize the return to shareholders (Jensen & Meckling, 1976). This to Drucker seemed strange, or as he put it,The emphasis is on the hammer rather than on driving in the nail, let alone on building the house(Drucker, 1973 p.23), but the latter idea gathered enthusiastic supporters and took hold, and as in any system controlled with narrow and explicit targets (in this case, numbers such as the share price and ROIC), has resulted in a large increase of efforts aimed at gaming the system. Incentives (limited in time frame by the duration of personal tenure of executive positions) are prescribed by Jensen and Meckling to limit divergence of interest between principals and their agent. Accent on share price and linked short-term incentives meant that executive pay, stock options and cash bonuses began to rise, together with accounting scandals and volatility (Denning, 2011). Enron, Tyco, Worldcom have all become well-known examples of this dynamic, but of the many illustrations available, Jack Welch (CEO of GE, great believer in the primacy of shareholder’s value and executive bonuses, Fortune’s “Manager of the Century” in 1999) stands out because of the recognition afforded to him despite the sheer size of the induced volatility; he grew his company’s market value reliably and impressively, only for 60% of that value to evaporate after his retirement in 2001. Important strategic decisions like the balance between size, profitability, profit growth or market share will always be influenced by bonuses rewarding a certain (usually short-term) target, to the detriment of  long term profitability. Governance fixes such as outside directors, outside chairman and government legislation such as the Sarbanes-Oxley Act certainly help, but others such as stock-based compensation can be as much part of the problem as the cure.

Despite the weaknesses of the strategic planning process, strategy will continue to come from this, as well as emergent sources. The production of emergent strategies is by their nature unpredictable and rational planning is well suited for certain capital intensive industries, investments that involve long amortisation, or businesses that enjoy stable, well-defined requirements and predictable environment.  But today there are few industries that experience stable environments like this, and when looking at the overall picture, Mintzberg’s claim that planned strategies tend to be less effective than emergent ones receives increased academic support. Poister (2010) argues that making strategy more meaningful in the future will require transitioning from the narrow focus on strategic planning to the broader process of strategic management, which involves managing the agency’s overall strategic agenda on an ongoing rather than an episodic basis, as well as ensuring that strategies are implemented effectively.

No matter what the source of the strategy is, steps at the monitoring and feedback stages can be taken to maximise their value in creating competitive advantage. In ensuring effectiveness of strategy, Drucker warns of placing primary emphasis on the shareholder’s value, and Poister goes even further by warning companies about reliance on any narrowly defined goals such as various management KPIs. Complementing the move away from strategic planning to more holistic strategic management, the performance movement must shift its emphasis from a principal concern with measurement to the more encompassing process of performance management (Poister, 2010). Another recommendation states that the link between strategy formulation and feedback needs to be made closer. This means that agencies will need to link their strategic management and ongoing performance management processes more closely in a reciprocating relationship in which strategizing is aimed largely at defining and strengthening overall performance while performance monitoring helps to inform strategy along the way (Poister, 2010). If planned strategy doesn’t provide the organisation with the expected value, the problem may lie not in the planning process itself, but the evaluation and feedback employed.

 

Conclusion

It is easy to show that strategy doesn’t just come from top-down, planned sources, but evaluating the effectiveness of strategies that do come from this source is a much more nuanced task. Research performed in certain sectors, or on otherwise limited population (small organisations with high R&D spend) found planning under those parameters to be beneficial, but research dealing with the general picture (such as Mintzberg’s, Bovaird’s or some of Poister’s) do recommend greater emphasis on emergent strategies and/or less weight on strategic planning.  Critics point out that planning runs into human limitations and in addition, and the complexity of today’s typical global organisations and the quickly changing environment further reduces the effectiveness of the slow, rational approach to planning. Difficulties in agent-principal relationships, the currently fashionable primacy of short-term shareholder’s value and preoccupation with evaluating performance through narrow goals and sets of numbers can further reduce the effectiveness of top-down planned strategies. Having said all that, even if emergent strategies are encouraged more, the planning process, despite being far from ideal, will continue to be one of the important sources of strategy. For that reason it is important to become familiar with techniques, legislation and organisational structure designs that allow the organisation to extract the best outcome from the planning process, and once the resulting strategies are put in place, better monitor and adjust them.

 

References

Benedict, R. (2005). Patterns of culture, New York: Mariner Books ISBN-13:978-0-618-61955-9

Bovaird, T. (2008). Emergent Strategic Management and Planning Mechanisms in Complex Adaptive Systems. Public Management Review  10(3), 319 – 340 DOI: 10.1080/14719030802002741

Denning, S. (2011 November 28). The Dumbest idea in the world: maximising shareholder value. Forbes. Retrieved from http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/

Drucker, F.P. (1973). The practice of management. New York: HarperCollins Publishers.

Drucker, F.P. (1973). The performance gap in management science: Reasons and remedies. Organizational Dynamics 73(2), 19-29

Friedman, M. (1970 September 13) The Social Responsibility of Business is to Increase its Profits. The New York Times Magazine. Retrieved from http://www.ethicsinbusiness.net/case-studies/the-social-responsibility-of-business-is-to-increase-its-profits/

Hill, W.L.C., Jones, R.G. (2010). Strategic Management: An integrated approach (9th ed.). Mason, Ohio: South-Western Cengage Learning

Jensen, C.M., Meckling, H.W. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics 3(4), 305-360

Mintzberg, H. (1994) The Rise and Fall of Strategic Planning. London: Prentice Hall.

Poister, H.T., Streib, D.G. (2005). Elements of Strategic Planning and Management in Municipal Government. Public Administration Review 65(1), 45–56

Poister, H.T. (2010). The Future of Strategic Planning in the Public Sector: Linking Strategic Management and Performance. Public Administration Review 70(Dec 2010 supplement), 246-254 DOI:10.1111/j.1540-6210.2010.02284.x

Song, M., Im, S., Hans van der B., Song, Z.L. (2011) Does Strategic Planning Enhance or Impede Innovation and Firm Performance? Journal of Product Innovation Management (28)4, 503-520, DOI:10.1111/j.1540-5885.2011.00822.x

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Weeding out my social circle

After the initial excitement of facebook and adding, nay, hunting down everybody, many “unfriend” or unsubscribe from their annoying “friends” on facebook. The promise and gumption of beginnings often fade like that, but the social arena is more complex and disorienting than most things. Life and people are confusing, it is as hard to live with people as without.

I’ve started culling my facebook friends too, and it works so well that I’m transferring this practice to real life as well. There could be a simple explanation, like reaching my neocortical processing capacity, my Dunbar’s number. I’m probably arriving to a similar place that American satirist Ambrose Bierce was at in 1902. Recognising the burgeoning network of acquaintances of modern life and the toll social clutter exacts on us, he has wished for a system of “disintroductions”. Someone with a power to proclaim “knowing the low esteem in which you hold each other, I have the honour to disintroduce you. I’m sure you will become very good strangers.” I like his calm approach. Instead of perceiving them as failed friendships, why not think of it as completed relations?

If a baby goes out once in a while with the bathwater, sorry…but I’m just managing my resources: I have fewer days on this earth with each day passing and the awareness that I have less time to waste on unfruitful or frustrating relationships is becoming more acute. After wearing the annoying behaviours for years, those behaviours have caused sore spots and I’m now becoming defensive, or hit out even at the hint of those behaviours. Yes, to others I will appear arrogant and judgmental, attributes actually listed on my own “hated” list below, but I can’t explain myself to everyone (only few would understand me, and even fewer would try). Happy to just let the friendship slide into oblivion, but can tell to their faces not to call as well. Am I getting so old that I care so little?

Who are the people that I’ve decided not to respond to or contact again? In descending order of annoyance (and significant overlaps), they are: Read the rest of this entry »

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Ode to the Road Part 1 – Introduction

Ode to the road

Northern Europe

 

 

Introduction

Our travelogue will be dominated by the road, this incredibly powerful and addictive invention. Its effects are everywhere around us; even if one doesn’t use it, its simple, unassuming presence makes horizons expand and brings the Outside in for all residents, together with all things we tend to classify as good and bad (there is remarkably little we don’t put into these bins). For the traveller, the effects of the road are stronger still. Apart from experiencing more novelty, the constantly changing landscape tends to shifts the brain into a state that records and retrieves things differently, enabling ”the peak achievement of the intellect … turning an incident into a moment that has been lived” (Walter Benjamin).

These effects takes on a extra significance when we realise that once the road has done its job, it cannot be un-done, just like the apple could not be un-eaten in Eden or the good and bad can’t be stuffed back into Pandora’s jar.

Roads are not like high rise building, standing tall and proud for all to see, advertising power and making residents feel superior. Nor is it like some technological marvel, making its creators and users feel a sense of achievement and pride in humanity’s ingenuity. The road is happy to be anonymous, walked upon without recognition. Once brought into existence, it is a silent, enduring force that performs its gentle magic, the effects of which is only exceeded by the power of written word. Read the rest of this entry »

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Ode to the Road Part 2 – Europe in 2010

Europe in 2010

Europe has been seemingly rendered irrelevant in the 21st century by the new ideas of the brash young guns of the liberal West where every day brings another 24 hours of progress, and lately with its sheer weight, centrally planned debt-free Asia. Disparaging phrases and metaphors about Europe come thick and fast to the mind of outside observers: past its prime, divided and conquered, neatly slotted into the long line of past empires dotting history’s timeline. Outside tourists visit this storied civilisation as a living museum, and if I was given to hyperbolae, I’d say with steps a little quicker for the fear of missing it completely before it disappears. Intuitively, there is nothing surprising about this; creative destruction, the new ideas trumping and killing off the old is one constant we have in human history and any society that doesn’t rejuvenate will turn sclerotic; once the effort turns to control, rather than creativity, the organisation/civilisation, reduced to keep repeating itself, will surely fall. Still, we are of the view that if we dig deeper, the popular first-glance view predicting a bleak outlook ignores the difficult story, the one much harder to tell but more revealing and kinder to the old lady Europe. Read the rest of this entry »

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Ode to the Road Part 3 – Ideas are not new

 

Ideas are not new

“The problem with the French is that they don’t have a word for ‘entrepreneur’.” The now famous words were (although disputed, almost certainly) spoken by George Bush while talking to Tony Blair at a G8 summit in 2002. I wonder if he knew that his title of Commander-in-chief also consists of two French words…but I digress. The point is, for the subject of the successful new world it is very easy to believe what they borrowed is theirs.

For example, isn’t the attractive architecture on the picture below is of the USA? It must be. Don’t we see this building symbolising the country of the free daily on the news?


White house, built in the 1790s (wikpedia.org)

With that background, this building then will easily look like a mere pale “copy”:


Stourhead estate from 1720s in Wiltshire, England (wikipedia.org).

Not many will know that Irish and English examples of this architecture were the basis of the plans for the White house. Even fewer will recognise that both examples belong to the Palladian architecture, named after Venetian architect Andrea Palladino (1508–1580). So, the creativity and innovation came from Venice, copied by the Brits and Irish, Europe’s mini-new world, and finally copied by USA, the world’s proper new world. Read the rest of this entry »

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Ode to the Road Part 4 – Why Europe?

Why is Europe so…European?

The life forms that inhabit various places on earth adapt to the particular environment. Humans might think that technology isolates us from this influence, and to a certain degree it does, but not as much as we tend to think.

Ok, the main discouragers, the hotter and colder climates have been conquered to a degree. Without air conditioning the only things moving in the south of USA would be tumbleweeds. Without energy technologies the productivity of the Finnish worker would be zero for the half year he or she can’t get out from under the duvet because of cold and darkness. But on a more subtle level, our geography still determines us and the lifestyles we lead. Whether we think of it or not, our norms have many direct and profound links to our environments. Read the rest of this entry »

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Ode to the Road Part 5 – Social capital

Social capital, the soft edge

In my opinion, the great political dichotomy has a big effect on whether social capital is nurtured or disregarded:

Greatest good for the greatest number            Respect for individual person’s autonomy


(Centrally planned, doing the expected)            (Market economies, individualism)        

China                        Europe            Australia        USA                

The right-wing market economies not only don’t see reason or have the long-term patience to foster building economically irrelevant social capital, but actually go out to actively destroy it. Consider Professor George Irvin, of University of London, who in 2010 paints a grim picture of what’s around the corner for Europe:

…the finance-induced, long recession is now being used as an excuse for dismantling the European postwar welfare settlement. The cost of this long recession will be borne far more by labour than by capital, far more by ordinary working people than by the bankers who caused it. Perhaps most disturbing is that Europe’s ‘social model’ will be so deeply damaged by lack of public finance that it will, in effect, cease to exist, or else become a patchwork of support programs for the ‘deserving poor’ [those in work] as in the Anglo-Saxon countries. The deficit-cutters are burying Social Europe.

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Ode to the Road Part 6 – A season of unity

A season of unity

 

For everything, turn, turn, turn,

there is a season, turn turn turn…

A time of borders, a time of unity…

 

Ok, the Byrds did adapt the book of Ecclesiastes much more poetically in their hit song, but it is true that there is a season for different things, and it is so hard to resist a version of the familiar stanza when it captures an incredible shift happening right under our noses so well.

Europe in the first half of the twentieth century was all about war and dividing strong, homogenous nations-a time for borders. Winners of wars gain territories, but losers got chopped up. Hungary, for example, long part of the central European superpower the Austro-Hungarian Empire is cruelly divided up by the treaty of Trianon in 1920, losing two thirds of its territories to surrounding countries and the two thirds of its people that were sentenced to live as minority in foreign cultures. Germany is split into two after the Second World War, as is Europe in general by the iron curtain. Travel generally requires costly and time consuming visa applications to each travel destination, changing money at very bad official exchange rates, learning languages.

At the height of economic nationalism in 1950s, the tide has turned, as they have a habit of doing at their heights. Liberal Europe has made a courageous U-turn and it was decided that it was time to make divisions disappear-the time of unity has arrived. The seeds of the European Union were sown in 1956, when Benelux countries first started to trade in coal and steel freely, risking a lot of angst creating new winners and losers would cause, but hoping in overall, long term improvement. The lowering of barriers to trade, people and ideas have only gathered pace since, involving more countries (width) and more activities (depth), and now this process is running at a pace never before seen in human history. Read the rest of this entry »

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Ode to the Road Part 7 – The old Roman division

The old Roman division

South-north integration will be slow, if not impossible, but there is another, less pronounced fault-line in Western Europe: the watery ditch across it formed by the river Rhine, Lake Constance and the river Danube.

This is the borderline of the old Roman empire, to the south-west of which the stylish, soft Latin people live until the 5th century, and to the north-east the progenies of tough Germanic, Viking, Celtic tribes and further to the east, the similarly tough Slavs. On a particularly cold winter in 409 AD the weakened Roman army couldn’t resists the hordes of barbarians crossing the frozen Rhine, and by next year the “Eternal city” itself was plundered of its gold and slaves by the Visigoths, a sack to be repeated by the Vandals (unfairly, the tribe became the source of the word vandalism) just 45 years later. But some things stay the same, and the habits of the population instilled during the long Pax Romana are still there, clearly marking the descendants of Roman republic-just take a hundred kilometres or so away, which the invading “barbarians” have now influenced. There are multitudes of observations that will illustrate this division, to me the most obvious ones (especially to the northern end) are summarised in this table: Read the rest of this entry »

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What markets should and shouldn’t do

We often face the impressive and efficient balancing forces of perfect competitive markets and try to convince others (or ourselves) of their efficacy in contentious area of policy, which are usually imperfect or uncompetitive markets. Before the armchair politicians we all can be shoot from the hip, let’s cover some basics, like: what are the perfect competitive markets the model is built on?

Competitive Markets
Competitive markets assume demanders and suppliers can easily enter or leave the market, as a result of which there are many demanders and suppliers in the market. Also, the product is assumed to be a homogenous product, about which factors like the prices and quality are well known (perfect information). We can apply economic theory if all these prerequisites are present, and the results are impressive-no one can argue how well the market models aid and predict say the organisation of production of potato, its distribution and pricing, and how badly centrally planned economies fared when removed the market forces and imposed controls on production, distribution and pricing. But these glowing results will cause us to try to apply the same models in other areas, like nature, medicine, education, media, etc. and forget the assumptions on which they are based. So, let’s ask the policy technocrat that tries to apply straightforward economic modelling in medicine: which of the assumptions are true?
Market forces in non-competitive markets
Let’s take medicine for an example. Suppliers of medicinal services cannot easily enter the market-apart from the cost and time involved in training, their number are artificially restricted by medical boards. Indeed the existence of powerful medical boards makes medicine a de facto monopoly, the antithesis of “many suppliers free to enter the market”, which fact alone should alert any free-market proselytisers. Medical information, even the “hardest” sort like clinical trials about efficacy of treatments is highly distorted by factors like the limited scope of investigation, evaluation of results over limited time horizon and partiality to the backers of research (drug companies). Investment depends on the potential profitability of the drug: longsuffering patients (say, high cholesterol sufferers) are the premium clients benefiting from the majority of research, but one-shot lifesaving drugs (antibiotics) aren’t (remember: to profit driven companies human life has no price tag, of only interest is the ability to pay for saving one). For ease of management administrators do their best to standardise the services provided (now even hospital funding is provided on the case-mix basis: one wound treatment is $X, one broken arm $Y), but everyday people can all recognise that every patient is different, and the easy cases will be cash cows, and there won’t be incentive to treat the difficult ones or to prevent problems from occurring in the first place.
We must realise that hard-nosed, profit-driven private interest relying on economic models developed with theoretical perfect competitive markets in mind, do not work and have no place in higher echelons of complex areas like medicine because of three types of problems: markets models are not applicable to complex products, the market is stuffed up by the interventions of special interest, and lastly, diametrically opposed un-reconcilable interests of entrepreneurs on one hand, and society as a whole on other.

“Un-Priceable” outcomes
Another factor that makes market models useless is the narrowness of criteria by which outcomes are judged. Human intelligence simply isn’t capable of pricing all possible outcomes to accurately reflect the utility they provide to our society in general and on a very long time scale-that would require omniscience. If we don’t know what is foregone, how do we know we are making the right choice? Since we tend to imagine ourselves as highly intelligent (and we tend to equate that to mean rational), we tend to assume that our rational decisions are “pretty close to the money”, but often the commonsense/obvious and rationally measured value are diametrically opposed. When we call something “priceless”, we identify that experience as, despite being free, having the highest value, above all material goods and services. For example we might go to a lake region to experience the serenity and awe witnessing nature’s beauty gives us, and later enthuse about the weekend spent as “priceless”. However, what the economist or commercial operator hears when listening to the same story is: “worthless”. A true entrepreneur is likely to decide to cut down the forest and start a jet-ski business on the lake. Sure, the lake and its surrounds will no longer be the source of priceless experiences to all that are drawn to it, but in economic terms, what has been given up? Nothing. The jet-ski business is producing utility where there was “none” before, therefore is a roaring success, literally and business wise alike. The GDP has further grown, and everyone applauds. The narrowness of criteria is exacerbated by the ruthless efficiency of the market model. Anyone that fails to jump to exploit any opening or gift of nature is eliminated and a more ruthless person will take the opportunity to price short term private profits above long term public benefit.
Of course, in the case of nature, governments around the world recognise this problem and wisely have created national parks, and other restrictions to stop the dismal science of economics from eliminating all un-priced utility, and reaching its predictable, joyless, homogenous end game. After all, we are used to seeing land as important, strategic resource. But we are much more tolerant of the same territory grabbing trick in other areas, like the media scene. Are ideas less worthy of protection than physical land? Should we create public areas for the varied ideas can flourish, free from being pressed into service and being exploited, like nature is allowed to thrive in national parks? I suspect so, but that message is a harder sell and under harder attack from interest group. Information and ideas, not land, give effective control in the 21st century.

Loss of diversity
Another outcome of ignoring un-priced and long-term outcomes is that commercial products have to be similar and mediocre, lacking foresight, originality and innovation. Media is a good example of this dynamic as well. Commercial movies, radio and TV stations take minimum risks, repeat what worked in the past or focus groups tells them work now, narrowly aim at the lowest common denominator and don’t invest in un-priceable aspects such as public taste or understanding. Copying and repetition are passed as innovation. As markets mercilessly eliminate anyone but the shows giving the highest returns this season, the formulas on how and what to produce become more cut-and-dry. As commercial media hones in ever more accurately on their narrowing and calculated demography, public broadcasters fill an ever more important role in identifying talent, new ideas, serving niche markets, innovation and satisfying those yearning for high quality exchange of un-priceables: ideas, taste, understanding, independence, diversity, etc.
Sadly, democratically elected politicians are a good analogy of commercial products. My problem is finding an analogy for public broadcasters in the political arena.

Social norms
There are psychological weak points unaccounted for in the market theory. Classical theory assumes rational demanders, who pay in proportion to the utility the goods provide. But there is another motivation factor: identity utility, derived by performing actions that conform to social norms (Akerlof & Kranton, 2010). This force explains phenomena like the rationally unexplainable concentrations of men and women in different job profiles. This is how (and not through some rational thought) the practice of paying thousands of times the value for bottled water is perpetuated. Companies with big market power realise this, and establish the norms that suit them by artefacts that obviously add no value for the society at large like advertisements. We could see how an overpowering social change like the Second World War could wipe the established irrational norms in job distribution: when there were no men to do the “manly” jobs, women filled the void, and thus created a new social norm. The end result is a more equitable and efficient labour force. Of course, we don’t need to create war to present a unified, overpowering force (central social planning?) to get rid of outdated norms inherited from different times, or inefficient and exploitative norms imposed by special interest. Hysterical slogans like “nanny state”, “big brother” will inevitably arise in the wake of such action. These slogans have their place, but not if a benevolent public representative with foresight exerts efforts to change what the market is never going to do on its own-another wrong application of a powerful idea, but that is another topic for another day.

Reference List:
Akerlof, G & Kranton, R, Identity Economics, 2010

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