Category — Economics

Above: Nanotech is coming to get you

One of the first definitions of Economics I came across in my life was “the study of scarce resources and unlimited wants.” That is, how choices are made with regards to which of the unlimited wants are to be met and not, or in other words, how resources are allocated. Here, markets come in as one of many possible mechanisms for making such choices socially.

In the context of Technology Governance, another way of understanding economics appears. That is, in recognizing that in the presence of innovation and changing technology, economic systems are not static, the extent to which resources are scarce depends on our ability to produce. As such, economics in this context can be better described as the study of how humans mitigate scarcity of resources by means of technology. Here, the core questions do not so much relate to allocation of scarce resources but to our changing capacity to make available those resources.

However, technology does not only change which resources or goods are available in which quantities, they also strongly influence the market (or other) mechanisms by which they get distributed. [Read more →]

Picture by Eric Pouchier

As we are being told that global warming looms, fossil fuels are running out, people are starving all over the world, and a global recession may not be over for a while;  encouragements to only take for oneself what is really necessary are becoming increasingly common. On the surface, this sounds nice. If we only consume what is necessary, then there will be more of everything left for those in greater need, we won’t pollute as much, and so on.

Nevertheless, whenever I hear someone urging others to restrict themselves to what is necessary, I can’t help but think: “necessary for what?” Necessity, by definition, means something you can’t do without. However, in order for such a word to make any sense at all, one needs to define what something is necessary for. For example, gasoline is necessary for most cars to drive. It is not, however, necessary for bicycling. And so on.

Now, when we are urged to only take what is necessary, then what are we really imagining as whatever we take being necessary for? The “good life”? In that case, how is “what is necessary” different from “what we want”? Perhaps it is necessary for a lot of us to have a summer house in Tuscany and drink expensive red wine for dinner every day. Or are we talking about what is merely necessary for survival? In that case, pretty much all conveniences that have been discovered during the last  hundred thousand years are not necessary. Forget about needing a cellphone, you don’t even get a house – your ancestors did just fine in a nice, warm cave. Is it necessary to live beyond age 80? Is it even necessary to be alive at all?

By all means, conserve all you want. But all this talk about restricting ourselves only to what we need is – at the very best – both quite absurd and a little intellectually annoying.

The Grinch Who Stole Twelfth Grade

So argues Republican state Senator Chris Buttars in the Utah State Assembly, who recently proposed to drop the last year of high school altogether in an attempt to balance the state of Utah’s bleeding budget. Of course, an advantage of doing this from state Sen. Buttars point of view would be less time to teach students Biology – the senator has previously sponsored a (failed) bill to change the curricula of the science subject so as to add in “Divine Design” as an alternative to evolution. Last year, Senator Buttars also stated that radical homosexuals are “probably the greatest threat to America going down I know of.” We here at Evolution-Revolution think deteriorating education might be a better guess.

I recently read Siddharta by Hermann Hesse,  a wonderful book set in ancient India about a young man’s search for understanding and inner peace. Amongst other profoundities, the book also contains some interesting insights on trading and investment. After a thorough brahmin education, followed by three years of life as an ascetic sadhu, the young Siddharta becomes an apprentice under a rich merchant. Only knowing how to, according to himself, think, wait, and fast, he quickly becomes a highly successful and very rich merchant. Importantly, he does this not by using greed or a hunger for “success” as a motivation, but rather by means of cool detachment. Hesse, of course, describes this far more eloquently than I could ever hope to:

“This Brahmin,” [the master merchant Kamaswami] said to a friend, “is not a proper merchant and will never be one; never is his heart passionately engaged in our transactions. But he has the secret of those to whom success comes of ts own accors, be it that he was born under a lucky star, be it magic, be it something he learned among the Samanas. He seems only to be playing at doing business. Never do the transactions have any real effect on him; never are they his master; never does he fear failure or worry over a loss.”

There is an interesting connection here, of course, to modern “practical investment” literature, in which the virtues of emotional control and self discipline are frequently emphasized as being of critical importance to success. The lesson to be drawn from Hesse, then, is perhaps that one possibly extremely effective way of achieving this just this is to not care very much about money – in a Siddhartian sense, “rise above” is perhaps a more appropriate choice of words.

It might not be so easy, though. In Hesse’s work,  Siddhartas spirituality is almost completely killed off by many years of hedonism and financial success – and he becomes so emotionally and philosophically tortured that he abandons his life as a wealthy merchant and almost commits suicide.

The Fall of Icarus by Rubens 1633

Intuitively, large foreign account reserves should be a cushion against runs on the local currency especially for countries with high foreign debt levels or lots of foreign investments that at some point need to be repatriated. If you don’t have enough foreign currency to repay, crisis will surely follow as we have seen during the many Latin-American or Asian balance of payment crises. As such, China’s enormous reserves of about 5-6 percent of global GDP should be reassuring, but as Michael Pettis explains the risks that threaten large developing countries are quite different from those smaller countries can experience.

“The risks that China faces today (and the US in the late 1920s and Japan in the late 1980s) is of excessive domestic liquidity having fueled asset and capacity bubbles, the latter requiring the uninterrupted ability of foreign countries to absorb via large and growing trade deficits. These risks include an explosion in domestic government debt directly and contingently through the banking system.”

Quite similar to what countries rich in natural resources often experience, where large inflows of foreign currency and current account surpluses cause bubbles to arise. And importantly, as foreign reserves cannot be used to solve the problems the solution lies domestically through higher interest rates, less lending, stronger currency and consequentially a less competitive export industry.

We all know what happened to the US and Japan, hopefully China will manage better.

Read the whole post over at China Financial Markets here

Rescuing a virgin in dire straits

The development of Norway’s soverign wealth fund, the Government Pension Fund (GPF), has always been interesting. GPF will this year attend 2000 meetings with American companies, in which they own up to 5 percent, urging them to separate the role of CEO and Chairman. They hope to make the governance structure more transparent and independent. Governance structure in many American corporations is arguably quite old fashioned and this should be a welcome nudge in the right direction. It’s hard to argue this to be a bad thing and it could quite possibly increase returns for Norway in the long run. Even a marginal increase would be significant as the stated investment horizion of the fund is infinite, that is until the collapse of the universe or the world financial system, whichever should come first.

James Galbraith argues that falling bank stocks are a sign of good things to come with respect to the planned regulatory overhaul of the financial sector. To the extent that such regulation is intended to limit rent-seeking and moral hazard, Mr. Galbraith makes a fair point. Perhaps the Obama administration is on the right track.

However, if the same indicators apply to the health sector, skyrocketing health insurance company stocks can hardly be taken to be a sign of better and more affordable health care around the corner for most Americans.

Picture by Josh Abene

In economics, the assumption that economic actors – i.e. people – are “rational” is a common one. By “rational” we mean that people, given a ranking of their preferences, will choose whatever options they prefer the most. Ironically, our definition of “rationality” means doing whatever you feel like.

More importantly, it means that if we propose to know how “rational” economic actors will behave, we are in fact proposing that we are intimately familiar with the emotional life of every economic actor relevant to our model.

It is of course easy to assume a preference ranking when working in the abstract. Also, we can argue that by putting a price or “pseudo-price” on anything and everything, we can just assume that everyone just wants a ton of money because this can be traded in for whatever else you might want. If you ask me, such a argument only proves right those who claim economists are amongst those who “know the price of everything, but the value of nothing.”

The authors of this blog merrily receive about 82000 Norwegian kroner (NOK, €10 000) every academic year in living support for students from the Government of Norway. As we study in Estonia and do not engage in currency hedging, our standard of living (in economic terms) is subject to the NOK/EUR exchange rate. (Estonia has pegged its currency to the Euro and is most probably joining next year)

Over at Financial Times they report that Credit Suisse has made its currency predictions for the next year and betting on the strength of the krone and selling the Euro. With the budget balance and current account surplus larger than 10 percent of GDP, lowest unemployment rate in Europe and buoyant stock and housing markets Norway looks like a sure bet. It looks like we can expect a lenient new year in Tallinn.

Of course there are certain caveats to such a prediction. Foreign exchange markets are notoriously hard to predict and from what I remember investment banks tend to fare worse than just predicting the current exchange rate. Further, as a small economy, Norway would suffer under the curse of small currencies if a new financial crisis was to arise (which many are predicting). Last, the krone correlates rather well with the oil price which might / might not be a benefit for an eventual speculator.

Thanks go to Radu, a loyal evolution-revolution reader, for sharing the FT-article.

Update (May 4th, 2010): More on the Future Prospects of the Norwegian Krone (it’s still on the way up) – New article