Model Power
By Kevin
Side-by-Side
In the recent report on China's rise in the world, The Economist featured a long discussion about China coming into the world order/framework that America has built and operated within as a new power. It then mentioned a problem:
But the picture is flawed. America has indeed been willing to be bound by rules in ways that 19th-century European powers never were. That is one reason why so many countries have been prepared to live under its sway. However, when America thinks important interests are at stake, it still ignores the rules, just like the next hegemon. In 2005 the bid of the China National Offshore Oil Company to buy America’s Unocal was, in effect, blocked after a public outcry. When America wanted a nuclear deal with India, it rode a coach and horses through the NPT. It fought in the Balkans in the 1990s and again in Iraq in 2003 without the endorsement of the United Nations. It may yet go to war with Iran on the same basis.
This is not to dispute the merits of each case, though some of those decisions looked foolish even at the time. Rather the point is that superpowers break the rules when they must—and nobody can stop them. Over time that logic will increasingly apply to China too. America must decide whether “accommodating China” means living with this or denying it.
Perhaps America would do better if it starts abiding by its own rules more and set a good example of what kind of superpower a nation ought to be in its perspective and allow China to follow. If they are hoping to influence the power equation of the future, the first step would be to behave (in the world affairs) in they way they hope China would in the future.
Fair Value Accounting
By Kevin
Doesn't matter who fights who...
ERPZ authors seem somewhat on a hiatus thanks largely to devotion to studies in university and the school holidays which means that students are largely slacking and not keen on searching the web for intellectual tidbits. Being in London for the winter also means I'm using the holidays for traveling and not writing for ERPZ. By and large, we're neglecting ERPZ but this should not stay too long. From this day on, I shall share a bit of my on-going research for my essays and articles so as to benefit my peers and students keen on current affairs and topics in Economics.
ERPZ disappointedly failed to provide much discussion about the financial crisis and its causes. One of the important 'causes' being finger-pointed at is that of Fair Value Accounting. It took me a while to realise what it is and then learn about its role in the financial crisis. It's interesting how this attempt to achieve a 'fair' valuation of asset prices ends up distorting it thanks to panic behaviour of investors or distorted incentives of managers. An article by The Economist points out the economic explanation for it:
Eliminating one market imperfection (such as poor information) need not bring the ideal of a frictionless economy closer, because this may magnify the effect of remaining distortions (such as managerial short-termism or illiquid markets).
I thought this is an important concept worthy of some thought. Free market advocates would often encourage policies that align real world markets more closely to perfectly competitive markets. Unfortunately, creating perfect markets is not about eliminating imperfections one by one but all at once. Therefore, not every de-regulation or removal of market failures would push it closer to perfect competition. The relationship has got to be more complex than that.
In any case, the whole episode about fair-value accounting shows that accountant's main concern of protecting investors through true and accurate disclosure do not always serve the entire system well and policy-makers may sometimes be put into a tight spot when the interests of various parties in the economy are pretty much at odds with each other.
Demand & Supply
By Kevin
Raise Prices
KOI Bubble Tea is cheaper in Toa Payoh than in town. Fans of KOI would immediately point out that it is untrue, given that the menus and the pricing of the products in the outlets are the same (or is it already different to reflect the demand differentials?).
As it turns out, when a firm refuses to raise prices at times of huge demands, supply will continue to stay below demand (shortages ensues) and while consumers enjoy the good at same prices, the ones who are more willing to pay the high price would jostle their way through, pit their patience in waiting lines with the less willed customers and even throw out their attitudes to buy their bubble teas. This is the implicit costs of the product when there is a shortage. And even when things are less tough than what I described, the fact that the area surrounding KOI at Illuma has turned into some sort of mini crowded park shows how the implicit costs have manifest itself as waiting time. Those willing to pay more would spend more time waiting (then again it may be influenced by the 'exchange rate' of time).
This brings me back to the point of why KOI bubble tea are more expensive in town: the queues are longer! When you factor in the implicit costs of stuff, you'd understand the reality of demand and supply. Our market has lots of friction despite being largely efficient and transport/transaction costs sometimes messes up price signals (from our perspective). I believe that a good way of solving the 'problem' here is to raise prices of the bubble tea in the town areas (in short run) and then try to raise the capacity of their production so that the supply of KOI bubble tea would increase in town if they would like to keep the current prices.
Price discrimination in different branches may actually be a combination of cost differentials, a genuine effort to price discriminate as well as demand differentials. In fact, other bubble tea shops practice that. Sweet Talk at Teck Whye Crescent is priced lower than the Sweet Talk at Lot 1 or Bukit Panjang Plaza (if I'm not wrong) and MacDonalds long offered value meals at slightly different prices in different branches. It is normal and paying more supposedly reduce your waiting time. If you rather pay it with your time, then feel free as well.
On Consumption
By Kevin
What to put into your trolley?
Now that I'm in London and wholly in charge of my personal finances, prices of stuff becomes more of a preoccupation to me. In Singapore, we're really lazy, but that's because the market is really small and prices are pretty much the same everywhere. It's as if the market competition operates more at a off-pricing level. In London, you really can hunt for bargains and get them.
Price labels in the supermarkets include the unit price of the goods so that you can better compare the deals you're getting. This also helps a lot when the packaging features weird sort of quantities. The milk here are sold in 'pints' and not litres. And apparently 2 pints is about 1.136 litres so you got to do the calculations yourself. I reckon most people just approximate 1 pint to 500ml and 2 pint to 1 litre. Then you're confronted with a huge choice of different foods to buy to prepare for your meals. You can get the ready cooked ones which are for lazy people, and also the raw food to prepare yourself. Sometimes I really wonder how my parents' generation made all these purchasing decisions. You wonder whether you're really maximizing your utility based on your budget constraint. And then again, how do you allocate your budget constraint amongst the many different categories of stuff you need to buy?
Maybe Economics is more useful to merely study the behaviour more as a retrospection of the outcome of the markets and also predict the general direction rather than serve as a means to compute the decision you should be making. In any case, you'd realise that as one grows up, consumption plays an ever-increasingly important role in your life and sharpening your ability to consume correct 'bundles' would be helpful. Think about what you're trying to maximize each time you purchase things. A good awareness of your preferences would be helpful and it is useful to change your preferences according to your budget constraints and the changing prices.
The Special Case
By Kevin
Gotta Come Down
For those students of A Levels Economics who still have no idea how asset bubbles form and why the classical theory of economics suggests that bubbles are unlikely might like to read the recent Buttonwood. A Special Case highlights why the properties of goods that are classified as assets are fundamentally different from the rest of the goods in the economy. This is not only about financial assets but those other goods that are treated as assets. During the tulip mania, the tulips were treated as assets briefly before the entire frenzy collapsed.
When price information feeds back into the demand of a good, the Law of Demand no longer applies and the demand curve of the goods starts sloping upwards. We never seen this sort of analysis done mathematically because it is an imprecise analysis and the equilibrium found is not meaningful (think about 2 positive gradient curves intersecting). George A. Akerlof and Robert J. Shiller brings in various other explanations for the emergence of depressions from disciplines like psychology in their Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism I just manage to borrow it from the library and hopefully I'll be able to finish and review it soon.
The Rising State
By Kevin
Which would you pick?
After countless years of experimentation, consensus on economic policies have not been quite useful in application because of acknowledgement of vast differences between individual economies and the fact that different cultures would have an influence on the reaction of the economy to a government policy.
Industrial policy usually seems pretty attractive as a means of guiding the growth of an economy. Singapore is an attractive example and our success too often is related to some sort of plan, policy or programme by the government that we almost forgot that the economy and people plays a huge part as well. The Economist is not exactly in favour of industrial policy. In the article, it highlights the trouble with industrial policy, and how the success claimed by it relied heavily on privatization and the free market.
Nevertheless, we must acknowledge that government does play a part in helping to brand the giants and create the necessary initial conditions and connections that the industries need to thrive subsequently. The industrial policy, is thus about giving the right industry the right aid or initiating the right investments and then moving out at the right time. In this aspect, Singapore has often done exceptionally well, recognizing when to deregulate a market, and also introducing competition.
The Economist highlighted an important point in its conclusion about industrial policy though:
[...] rather than the failed policy of picking winners, governments should encourage winners to emerge by themselves, for example through the sort of incentive prizes that are growing increasingly popular.
Another article elaborates more on the core arguments about industrial policy. Indeed, the industrial policy should not be able 'picking winners, saving losers'; it should be designing an incentive structure that will lure winners to emerge. That is the power of the market and the government should help out with this rather than interfere with the incentive system.
Lights Out on Government Intervention?
By Wei Seng
Really?
Paul Krugman, an economics professor, self-proclaimed liberal and columnist for The New York Times, writes in a recent article about how government intervention has been misconstrued by those championing a small government and the disastrous results of the attack on government intervention. While he might be biased towards the government because of his liberal tendencies, his arguments in the article certainly make some sense and are worth reading considering the barrage of articles against government intervention in America these days.
He first describes the crumbling infrastructure of more and more places in America, from roads to education, which he alludes to shrinking state and federal budgets. "Tax increase" is the taboo word these days in an age whereby recovery from recession is still fragile yet "deficit reduction" is on everyone's (at least the Republicans') lips, both at the state and federal level. Even tax increments on the rich are lambasted as a crusade by the government against big business, and we learn in Economics that a disadvantage of high taxes on the upper-income brackets is the repulsion of rich businessmen towards lower-tax countries. But the tax increments could have gone to repairing and reconstructing infrastructure which the majority use, while at the expense of the happiness of "the richest 2% or so of Americans".
Krugman has all along been against withdrawing the stimulus against the recession early, warning that the recovery thus far has been fragile and it will take plenty of time and money for the economy to bounce back to where it once was. The effect of states cutting spending cancelled out the positive effect of federal government spending, and now with federal spending poised for cuts America "is going into reverse".
Krugman is especially angry with conservatives who believe that "a dollar collected in taxes is always a dollar wasted, that the public sector can’t do anything right". A balanced perspective of the economist should be one that allows the free market to operate, but with guidance from the government. It does certainly seem twisted if the government is alluded to be unable to do "anything right", especially for a government like America's, even if governments of many failed states such as Somalia and Afghanistan have seemed unable to really do anything right.
In essence, time to think about what the government can do right, and not what it can do wrong.
The Wave
By Kevin
Receding Tide
Apparently Google decided to cease development of Wave (but maintain the site at least for the remainder of the year) because users have not exactly found good uses of the product and thus adoption and usage is not exactly ideal. After the initial fanfare and hype about Google Wave, I didn't quite use it. I personally think that the recorded typing might be useful under certain circumstances but not always and so users should be allowed to easily disable it. The arrangement of the discussions should also be in reverse chronological order so that you don't have to try to scroll down a really long discussion.
I discover these main ills because I did use it for a collaborative project I did recently. The system is useful for us in general but there were times when it was down. Seeing your friends type in real time might be fun but without a powerful computer, it lags and you might be tempted to reply when your friend have not finished what he wants to say. The good thing is that almost everything is recorded and we can always check back when necessary.
Yet the 'failure' of Google Wave represents the success of Google; by working on many different projects, Google manages to explore multiple ideas at the same time. While different amount of resources and efforts are dedicated to different projects, they are willing to terminate even a high-profile, hyped project show that their model is successful. The ability to create such a 'market-based' testing is immensely useful to the firm. Much must have been learnt from failed experiences and we really should celebrate all that.
Thinking Economics
By Kevin
Mind Tricks?
People thinks I'm very rational when it comes to making decisions (especially personal ones), but it is really more about thinking economics than rationality. Economics was founded based on the assumption that all individuals are rational and acting on self-interest. Too often, however, we know little about what is really in our interest and worse of all, we have no idea how to put it into the equation. It'll then help to look at the market and what it is doing to decide.
It appears ironic that individuals may peer at the market to learn how to be rational when they are part of the market itself. Nevertheless, the fact remains that while individuals are capable of making good direct comparisons, complex patterns of choice emerge only through the market, which aggregates decision-making of an independent crowd (an important concept I briefly touched previously). The concept of opportunity cost proves invaluable at decision-making - when you can't decide what you want, think about what you are willing to forgo.
I was thinking about how capable kids around me often have parents who are not particularly educated and perhaps not with any outstanding careers. Of course there are exceptions but many smart capable people do have just plainly ordinary backgrounds much like mine. It dawned on me that the question is really how 'ordinary people' make such great parents. Parents who have a great career simply have to sacrifice much more in order to expend effort at raising their kids.
The high opportunity cost simply means that it might actually make sense for them to 'outsource' the work to someone who has less stake in their kids. In many sense, the same principles applies to a kid - for one who expects to be able to live life comfortably and have little expectations of themselves, slacking away poses a lower opportunity cost than one who knows that the alternative to working towards success is deprivation. Of course, I'm assuming that the kid has the level of maturity to consider this and understand the concept of opportunity cost, intellectually if not intuitively.
Eventually, what remains required besides economics thinking would be discipline; and discipline could also be explained by an intuitive grasp of economics and incentives. With the right way of positioning ideas in one's mind, one would be able to accentuate long term incentives while downplaying the benefits of instant gratification. That's what everyone in the west has to learn today.
Lessons to learn from Norway
By Wei Seng
Paradise on Earth?
First published in The Guardian on Wednesday, then republished in The Straits Times, Timothy Garton Ash writes about Norway vis-a-vis the European Union, and some of the lessons that can be learnt from Norway and about Norway.
The writer refers to Norway as "close to a paradise on Earth" because of high living standards and social equality. This, he says, allows many people to use Norway as an example for many things. British MPs from the Eurosceptic Conservative party claim that Norway's being out of the EU and its resultant prosperity meant that Britain could leave the EU and probably do as well as Norway could. Researchers also cite Norway as an example of how greater equality could have spillover benefits in terms of education and crime amongst other social indicators. And for those "hydrocarbonists" who support the "drill, baby, drill" faction, Norway is the epitome of how oil drilling can create prosperity and equality, since Norway's economy (and hence social democracy model) is sustained by significant exports of oil and gas drilled in its waters. And there are some who allude Norway's success to its historical and cultural links to the Vikings and their traditions and characteristics.
But the writer would like to remind readers that it is easy to draw "too-simple lessons from the experiences of other countries, or of projecting on to them lessons you want to draw for your own". In short, only highlighting what serves your own purpose and neglecting the rest. One may also fall into a trap, the frequently-commited "fallacy of confusing correlation with cause". The lessons that should be learnt need to be the right ones as well: emulating the success stories of another country in your own, in a totally different context, can produce wildly different results.
And, well, even supposed-Paradise Norway is not immune to the "shockwaves of world politics", as the country struggles (like many other European nations) to integrate its growing Muslim populace and its exports have to be imported by its European neighbours for the country to earn any money at all.
So what can Singapore learn from Norway? Maybe tips on the social democracy model that Norway champions, given that Singapore tends to be averse to some of the ideas of social democracy such as pensions because of disincentives to work. Or perhaps how the country manages to create such an egalitarian society, important given that Singapore is becoming a more unequal society as the country continues to grow and develop.
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