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As printed in The Economist]]> General http://www.brentwheeler.com/index.php?itemid=994 Tue, 15 May 2012 15:04:15 +1200 Links for April - BWG Website http://www.brentwheeler.com/index.php?itemid=993 Is America Becoming an Anti-Risk Welfare State?

Perils of Social Responsibility - Reread Friedman

Old age? Ronald Coase is still enlightening us at age 102...

Learning Economics from the Classics - 12 Months of Classic Papers

Economics from the Classics Series - Part 1 The Case for Free Trade

FINANCE page
Clues as to why forecasting is a hopeless endeavour

MUSIC page
Real or incidental?

LITERATURE page
That Apple
]]> General http://www.brentwheeler.com/index.php?itemid=993 Mon, 14 May 2012 20:54:20 +1200 Fundamental Assumption Underlying Marketing http://www.brentwheeler.com/index.php?itemid=992

]]> General http://www.brentwheeler.com/index.php?itemid=992 Mon, 14 May 2012 19:02:18 +1200 Links for March - BWG website http://www.brentwheeler.com/index.php?itemid=990 Murray Lender, Bagels & How Capitalism is Supposed to Work

Austerity - the nasty medicine that works.....provided you take it

Explaining the value of capitalism...

And we all pay to wind up another "marvellous co-operative" - annoying exits

FINANCE page
Why Smart People Fail to Beat the Market

Bull Market Characteristics

MUSIC page
James Brown Said It Loud

Music - save the brain without being bored by Sukoku]]> General http://www.brentwheeler.com/index.php?itemid=990 Wed, 9 May 2012 10:15:25 +1200 Economics from the Classics - Series.... Part 2 I Pencil http://www.brentwheeler.com/index.php?itemid=988
Instead prices working in markets adjust supply and demand for each and every good and service required to make a pencil.

This is remarkable. It also indicates that the level of complexity required to manufacture something as simple as a pencil would certainly be well beyond any bureaucrat or government to achieve in a fashion which comes even close to that achieved through the coordinating mechanisms of pricing and markets.

Read I Pencil (Browser Back Button to return to site)]]> BWG Training http://www.brentwheeler.com/index.php?itemid=988 Tue, 8 May 2012 23:29:12 +1200 Beyond Economics into Life http://www.brentwheeler.com/index.php?itemid=987
Take the grossly underreported problem of “size inflation”, where clothes of any particular labelled size have steadily expanded over time. Estimates by The Economist suggest that the average British size 14 pair of women’s trousers is now more than four inches wider at the waist than it was in the 1970s. In other words, today’s size 14 is really what used to be labelled a size 18; a size 10 is really a size 14. (American sizing is different, but the trend is largely the same).Fashion firms seem to think that women are more likely to spend if they can happily squeeze into a smaller label size. But when three out of four American adults and three out of five Britons are overweight, the danger is that size inflation reduces women’s incentive to eat less. Meanwhile, food-portion inflation has also made it harder to fight the flab. Pizzas now come in regular, large and very large. Starbucks coffees are Tall, Grande, Venti or (soon) Trenta. “Small” seems to be a forbidden word.

Inflation is also distorting the travel business. A five-star hotel used to mean the ultimate in luxury, but now six- and seven-star resorts are popping up as new hotels award themselves inflated ratings as a marketing tool. “Deluxe” rooms have been devalued, too: many hotels no longer have “standard” rooms, but instead offer a choice of “deluxe" (the new standard), “luxury”, “superior luxury” or “grand superior luxury”. Likewise, most airlines no longer talk about “economy” class. British Airways instead offers World Traveller; Air France has Voyageur. Sardine class would be more honest. The value of frequent-flyer miles is also being eroded by inflation: it is increasingly hard to book “free” flights; they cost more miles, and redemption fees have increased. This was inevitable: airlines have been issuing so many miles (for spending on the ground as well as in the air) that the total stock is worth more than all the dollar notes and coins in circulation. Central bankers would shudder at such reckless inflationary policies—were they not themselves earning triple miles up in first class.

Some other strains of inflation have more serious economic effects. One example is grade inflation, the tendency for comparable academic performance to be awarded higher grades over time. In Britain the proportion of A-level students given “A” grades has risen from 9% to 27% over the past 25 years. Yet other tests find that children are no cleverer than they were. A study by Durham University concluded that an A grade today is the equivalent of a C in the 1980s. In American universities almost 45% of graduates now get the top grade, compared with 15% in 1960. Grade inflation makes students feel better about themselves, but because the highest grade is fixed, it also causes grade compression, which distorts relative prices. This is unfair to the brightest, whose grades are devalued against those of average students. It also makes it harder for employers to identify the best applicants.

Fight the flab
Employers are themselves distorting the jobs market with job-title inflation, which has recently accelerated because a fancier-sounding title is cheaper than a pay rise. Firms are awash with an excess of chiefs and directors, such as Director of First Impressions (receptionist) and Chief Revenue Protection Officer (ticket inspector). This is not just a laughing matter. Job-title inflation has economic costs if it makes the jobs market more opaque and makes it harder to assess the going pay rate.

Inflation of all kinds devalues everything it infects. It obscures information and so distorts behaviour. A former German central banker, Karl Otto Pöhl, compared inflation to toothpaste: easy to squeeze out of the tube, almost impossible to put back in. The usual cure, monetary and fiscal tightening, will not work for panflation. Women will never squeeze back into their old clothes unless they reject size inflation. Instead, it is time for everybody to tighten belts (literally) and fight all sorts of inflationary flab.

The Economist
]]> General http://www.brentwheeler.com/index.php?itemid=987 Tue, 8 May 2012 10:32:19 +1200 Is America Becoming an Anti-Risk Welfare State? http://www.brentwheeler.com/index.php?itemid=983
By VITO J. RACANELLI

Niall Ferguson, economic and financial historian, sees parallels between the U.S. now and the mid-20th-century U.K.
In his latest book, Civilization, The West and the Rest, the economic and financial historian Niall Ferguson argues that Western civilization's rise to global dominance over the past 500 years was due mainly to six killer apps, as he calls them: competition, science, rule of law, modern medicine, consumerism, and the work ethic.

While "the Rest" lacked these concepts, they might not for much longer, as emerging markets are quickly catching up. Someday, they could even surpass the West. (On May 22 and 29, PBS will air a program based on Civilization.)
The Scottish-born Ferguson says that North and South American economies and institutions are converging. And, he adds, while China remains a long way from a rule-of-law democracy, anyone who thinks it will retreat from the markets is in for a rude surprise.

Lately, Ferguson, who is a professor at Harvard—Barron'sinterviewed him in his Cambridge, Mass., office—and holds similar posts at Oxford and Stanford, has been worried about the market-destabilizing potential of a Middle East conflict, and says that going long oil is a good bet. And he thinks the U.S. is on a slippery slope that could turn it into a European anti-risk-taking welfare state.

Barron's: There are once again concerns about U.S. growth. What factors are keeping the economy from reaching what you call "escape velocity"?

Ferguson:I'm skeptical that the U.S. can get to a self-sustaining recovery if we only increase monetary or fiscal stimulus. Part of the reason why the U.S. economy is not growing faster is policy uncertainty, and part is structural weakness. In terms of institutional policy, the U.S. is a relatively less attractive destination for investment than it used to be. A large body of literature shows a strong relationship between the quality of institutions and the growth rate. When countries improve rule of law, property rights, and investor protections, and when regulation becomes more transparent and corruption reduced, there are major payoffs. The World Justice Project says the U.S. has been deteriorating for close to 10 years by all these measures, which contrasts with improvements in some emerging markets, like Hong Kong.

The rule of law has become more expensive in the U.S. without becoming more efficient. Any business, particularly small to medium-size, that has had encounters with litigation in the past 10 years will know what I'm talking about. The rule of law in the U.S. has become, at some level, dysfunctional. One reason for that is the way Congress works. It is a honey pot for lobbyists. The result is that complex legislation is riddled with ambiguities that—guess what?—only lawyers can resolve. Dodd-Frank is designed to improve regulation, but what it actually does is institute a massive job-creation scheme for lawyers. There isn't a financial institution in this country that doesn't now require its compliance department to retain a whole bunch of lawyers to explain to them what this 2,000-plus-page monster means for their business. That concerns me.

If you locate a new plant in the U.S., you encounter this increasingly unfriendly regulatory and tax environment. You don't know what the taxes are going to be, because Congress is playing a game of chicken about the deficit. It ought to be solvable. However, there are vested interests in the political system that have no interest in solving this problem because they profit from it. It is a classic problem of rent-seeking behavior triumphing over profit-maximizing innovation and entrepreneurship. If you only look at monetary and fiscal policy, it is incredible that the economy isn't growing faster [since] it has had more stimulus than at any time since World War II.

Can you liken this to anything in history?

A parallel is the way that things went wrong in Great Britain in the mid-20th century, when a combination of overseas commitments, excessive public debt, vested interests in the form of organized labor, and incompetent management and a pretty decadent ruling elite made Britain the sick man of Europe. There are some lessons there. Over time, good institutions tend to deteriorate because of the human condition. There needs to be a renewal of American faith in the founding principles. A lot of ordinary Americans, especially businessmen, yearn for this and resent the crony capitalism they see between Washington and Wall Street.

Are you optimistic or pessimistic?

It's always a good idea to be optimistic about the U.S. Ultimately, political leadership will materialize, because the popular instinct on many of these questions is sound and there are political leaders—[Wisconsin Republican Rep.] Paul Ryan, for example—who have integrity and are prepared to push unpopular measures that will ultimately prove beneficial. It isn't just the tax code. It's an incredibly complex accumulation of regulation and legislation, the net effect of which is to make it harder to be an innovator and entrepreneur. Not only is the U.S. doing less well in these terms than Hong Kong or Germany, but it is doing less well than the U.S. used to do.

What are your thoughts about the Chinese economy? Japan was supposed to overtake the U.S. years ago and didn't.

China is not where Japan was in 1989, but where South Korea was in about the mid-1970s, which means it has a lot further to go with its export-led industrialization strategy. It is a vast version of South Korea. A fifth of humanity is currently benefiting from a transition to market reforms. Anybody who bets that will suddenly stop is going to be disappointed, and make some epically bad investment decisions, too.

The people who are certain to emerge in charge of China, like Vice President Xi Jinping and Vice Premier Li Keqiang, are sympathetic to the argument that China needs to move in the direction of markets and away from state capitalism. The model that is gaining ground wants to see more privatization of state-run enterprises, increasingly flexible capital accounts, and an end to the manipulation of the exchange rate. If this happened, not only would hot money come into China, but actually a lot of Chinese money would leave. If you wanted to make a single thing happen to stabilize the U.S. property market, it would be liberalizing China's capital account.

How compatible is capitalism with China's form of government?

More than we might assume. A one-party state was essentially the norm in most East Asian economic miracles. South Korea only moved away from a military dictatorship in the 1980s. I don't think we'll see multiparty democracy in China in our lifetimes, because the Chinese are right when they say our system can't work for a fifth of humanity at this stage of China's development. They would be very foolish to rush into the kind of things we periodically say they should do, such as allow political opposition to form. The Chinese know how dangerous that is.

The lesson of Chinese history is that this enormous entity that we call China has a capacity for centrifugal forces to take over. China will move in the direction of rule of law with a one-party state, which will become more subordinate to a meaningful rule of law in the sense that the private property rights of individual Chinese will become more secure. Most absolutist monarchs in the 19th century made that kind of transition without ceding power to parliament.

One hundred years from now, if your grandchild writes a sequel to Civilization, what will it say?

It will say two things happened, beginning in the late 20th century and carrying through into the 21st. The rest of the world learned best practices in economic and, to some degree, political terms. The people living in Asia and South America and even parts of Africa no longer live in miserable poverty with no security.
The other trend that proved far more pernicious was that the West, particularly Europe but also the U.S., failed to update its political or economic institutions, and that's why its economies stagnated. We already see that in Japan. It is already a feature of life in much of Europe, and we have to worry about it coming here.

What made the West unusual was that risk takers were not only rewarded but honored, whether in science, exploration, or in trade. Spreading across the Atlantic from Europe is an anti-risk culture that manifests itself in two ways. One is the welfare state, designed to remove risk from your life by guaranteeing you an income from the cradle to the grave. That's great because it means that nobody is starving in the streets for want of work. But it isn't great if you create poverty traps and disincentives, so that people in the bottom quintile never work, which is the case in much of Europe.

The other way in which the anti-risk culture manifests itself is with the manic regulatory mentality that tries to prescribe rules for every eventuality, including the tiny, tiny risk that an asteroid will hit this building. Regulations that protect from every eventuality end up being paralyzing because the more things are proscribed, the more the ordinary entrepreneur has to be afraid that if he doesn't comply, he will get sued.

What about the euro?

The costs of dismantling the euro are so high that the Europeans will do whatever it takes to prevent that. What it will take is a transition to something like a fiscal federal system where there are no longer bailouts; there are automatic transfers and there are going to be eurobonds so that the full faith and credit of the German government lies behind at least part of the debt of the other countries. Berlin knows this but dares not spell it out explicitly, because the bill for the German taxpayer will be quite large. You are talking about 5% to 8% of gross domestic product every year for the foreseeable future.

But it isn't in the Germans' interest to blow up the euro. That isn't something Chancellor Angela Merkel wants to have in her Wikipedia entry. The principal beneficiary of the euro is German business. As long as Corporate Germany appreciates having the euro, and German voters still have some residual guilt feelings about history, then they pay. How does this transition to something more like a Federal Republic of Europe happen? It will proceed along a very bumpy road over a 12-to-18-month period. The ultimate destination will be something like a European financial authority/treasury that gradually accumulates the funds it needs. There will be painful negotiations, but they'll get there because they have to.

Can you make a case for South America catching up to North America? Or are Venezuela and Argentina the vanguard of another cycle of falling backwards. And what about Brazil?

It would be very surprising if Brazil was to fall back. The costs of being Venezuela or Argentina are too obvious to anybody in the region, and the benefits of being Brazil are even more obvious. Not only for Brazil, but quite a substantial number of the Spanish-speaking countries—Peru, Chile, Colombia, Mexico—the picture is sustained institutional improvement, with a long way still to go. Compared with where these countries were 20 years ago, they are closer to rule of law. If you had invested in those countries 10 years ago, you would be in a much better place than if you had invested in North America. I'm cautiously optimistic about the region.

Mexico, if you just looked at the numbers, is much closer to Brazil than people realize. A good test will be whether the new president turns the Mexican oil monopoly into something like Brazil's Petrobras. This is a story of convergence. South America is getting more like North America, and North America is getting more like South America.

What big geopolitical risks do you see?

The Arab Spring has a long way to run, with many unforeseeable consequences. The biggest risk is conflict in the Middle East. Whether it is Israel/Iran I don't know, but there is going to be trouble. Nothing about the Arab Spring is good news for Israel. Their insecurity can only increase over time, and there is a real struggle about who is going to run the region once the U.S. essentially ceases to run it or runs it much less than it used to. It's hard to feel really cheerful about the prospects of peace. Being long oil has to be a simple bet under those circumstances, quite apart from supply-and-demand constraints.

The other big risk is the game of congressional chicken about the U.S. deficit. It's the most dangerous game in the world today. Are we going to replay the debt-ceiling arguments of last summer right through November and into the new year? I worry that—at a time of already high uncertainty about policy with a train called sequestration heading towards the U.S.—political brinkmanship will ultimately have real economic consequences. The U.S. is on an unsustainable fiscal path. With every passing year, it gets harder to fix because the major problem, Medicare, gets larger, and the political obstacles seem to get larger with it.

At what point does the U.S. start to jeopardize its credibility as a sovereign borrower? History suggests a great power can end up with a very large debt burden before the markets lose faith. The U.S. might play this game of brinkmanship for years before the deficit is brought under control. We can end up with a debt-to-GDP ratio of 250%. That's happened to other countries. But you can't guarantee that the markets will cut that much slack.
]]> Policy http://www.brentwheeler.com/index.php?itemid=983 Mon, 30 Apr 2012 20:17:21 +1200 Perils of Social Responsibility - Reread Friedman http://www.brentwheeler.com/index.php?itemid=976 Corporate responsibility goes bananas
Chiquita has tried hard to be good—and got no credit for it.

Sometimes you bend over backwards to please, but still get nowhere. That is what appears to have happened to Chiquita Brands, an American firm which is one of the world’s biggest suppliers of bananas and other fruit. Despite accommodating eco-warriors, social activists and unions, it has found little reward.


After a campaign by a green group called ForestEthics, Chiquita agreed in November to avoid fuel from Canadian tar sands. Extracting this oil is a dirty process. Environmentalists have worked furiously to block a pipeline, called Keystone XL, which would carry it from Canada to America. Chiquita told ForestEthics that it does not use such fuel in its ships and agreed to avoid its use in lorries.

This may have pleased environmentalists, but it infuriated Canadians who depend on the oil industry. A pro-business lobby called EthicalOil.org is urging a boycott of Chiquita’s products that is said to be costing the company a fortune. Chiquita would not quantify its losses.

Chiquita traces its origins to the late 1890s and the United Fruit Company, which treated some of the Central American countries it operated in as banana republics. In recent years, however, the firm has made huge efforts to promote social responsibility and sustainability, working with activist groups such as the Rainforest Alliance. “We can do good and do well at the same time,” Fernando Aguirre, the firm’s chief executive, wrote in the company’s latest social responsibility report, issued in 2008.

Chiquita has signed and largely upheld a global agreement with local and international food unions. It has embraced sustainable farming techniques and allows products to be certified for environmental and other standards. Last year it promised to promote more women and to ensure there is no sexual harassment on the plantations it owns and buys from. But that has not provided protection from big retailers buying bananas direct from plantations and bypassing Chiquita and its main rivals, Dole and Fresh Del Monte Produce.

Many firms in conflict zones face extortion. In 2003 Chiquita became the only American company voluntarily to admit to the Department of Justice that it had paid protection money to Colombian paramilitary forces surrounding its plantations. Now it is facing a raft of American and Colombian lawsuits.

Chiquita’s conspicuous lack of reward is beginning to worry some veteran campaigners. Neither Dole nor Del Monte has been interested in following Chiquita in signing a global union agreement, says Ron Oswald, head of IUF, the international foodworkers’ union.“It’s not sustainable for any company in a competitive sector to make progress and gain no recognition for it,” he grumbles.


Economist March 31 - April 6, 2012]]> Environmental http://www.brentwheeler.com/index.php?itemid=976 Thu, 12 Apr 2012 11:47:00 +1200 Old age? Ronald Coase is still enlightening us at age 102….. http://www.brentwheeler.com/index.php?itemid=975
Some observers praise its 'state-led capitalism.' But the truth is that leaders, starting with Deng Xiaoping, loosened Beijing's control.
By Ronald Coase and Ning Wang

China's post-Mao market transformation is one of the most dramatic and momentous events of our time. It has lifted hundreds of millions out of extreme poverty, freed one fifth of humanity from ideological radicalism, revived one of the oldest civilizations, and inspired all of us to explore the benevolence of the market.

Yet capitalism as currently practiced in China suffers a severe failing: the lack of a marketplace for ideas. China's market transformation flourished at the ground level without much help from Beijing—contrary to its leadership's claims. But the free flow of ideas has faltered. Until that changes, China will never reach its full potential.
At Mao Zedong's death in 1976, few, if any, could have foreseen that China, then one of the poorest and most isolated countries in the world, would become a dynamic market economy in just three decades. An added surprise is that all this happened under the auspices of the Chinese Communist Party, which was committed along the way to modernizing socialism.

When China started reforming and opening up, it had little knowledge of the market economy. Mao's grandiose but disastrous policies had gravely impoverished the country materially and intellectually. China had been isolated from the West and cut off from its own traditions. With no blueprint, it had no choice but to work within the ruins of socialism, through tinkering and improvisation. This experimental approach was helped along the way by the resuscitation of the Confucian tradition of "seeking truth from facts."

China's road to capitalism was forged by two movements. One was orchestrated by Beijing; its self-proclaimed goal being to turn China into a "modern, powerful socialist country." The other, more important, one was the gross product of what we like to call "marginal revolutions." It involved a concatenation of grass-roots movements and local initiatives.

While the state-led reform focused on enhancing the incentives of state-owned enterprises, the marginal revolutions brought private entrepreneurship and market forces back to China. Private farming, for example, was secretly engaged in by starving peasants when it was still banned by Beijing. Rural industrialization was spearheaded by township and village enterprises that operated outside state control. Private sectors emerged in cities when self-employment was allowed to cope with rising unemployment. Foreign direct investment and labor markets were first confined to Special Economic Zones.

All these marginal forces had been either harshly oppressed or heavily regulated during Mao's era. Fortunately, post-Mao Chinese leaders—most notably Deng Xiaoping—embraced change. Mao's failure taught them to stay away from ideological hubris and re-embrace pragmatism. Under their leadership, Beijing admitted its lack of experience in reform. Local initiatives were first allowed, and later encouraged, to play a leading role in market-oriented experiments.

Inadvertently, this process led to the relatively thriving market we see in China today. When Beijing still preached socialism, local authorities explored new, market-oriented approaches to revive local economies. While Beijing held tight to political power, it was no longer a central planner. As provinces, cities and counties all competed for economic development, China became a giant laboratory of regional competition.
China's leaders have never given up on socialism, which in their minds calls for public ownership to ensure shared prosperity (even though state-owned enterprises have exacerbated inequality and corrupted politics). They insist on keeping key sectors—including banking, energy, communication and education—under state monopoly. As a result, many characterize the Chinese economy as "state-led capitalism." But it was really the marginal revolutions and regional competition that ushered in China's economic rise.

In the years to come, China will continue to forge its own path, but it needs to address its lack of a marketplace for ideas if it hopes to continue to prosper. An unrestricted flow of ideas is a precondition for the growth of knowledge, the most critical factor in any innovative and sustainable economy. "Made in China" is now found everywhere in the world. But few Western consumers remember any Chinese brand names. The British Industrial Revolution two centuries ago introduced many new products and created new industries.

China's industrial revolution is far less innovative. The active exchange of thoughts and information also offers an indispensable foundation for social harmony. It is not a panacea; nothing can free us once and for all from ignorance and falsehood. But the free flow of ideas engenders repeated criticism and continuous improvement. It also cultivates respect and tolerance, which are effective antidotes to the bigotry and false doctrines that can threaten the foundation of any society.

When China started reforming itself more than three decades ago, Deng rightly stressed the "emancipation of the mind" as a prerequisite. But that has yet to happen. It's time for China to embrace not just the market, but the marketplace of ideas. This will help not just China reach its full potential, but the world as well.

Mr. Coase is a Nobel laureate in economics and professor emeritus at the University of Chicago Law School. Mr. Wang teaches global studies at Arizona State University. They are co-authors of "How China Became Capitalist," out this month by Palgrave Macmillan.

Thanks for Pointer D. Haarmeyer]]> General http://www.brentwheeler.com/index.php?itemid=975 Mon, 9 Apr 2012 16:46:42 +1200 Economics from the Classics - Series.... Part I The Case for Free Trade http://www.brentwheeler.com/index.php?itemid=973
The first of “Learning Economics from the Classics” involves free trade. In my experience a large number of people think they understand what free trade is but, in fact and as evidenced by some of the arguments I hear, they do not. This paper sets out the case very clearly and is fundamental to the understanding of almost all economics.

While economists differ on a number of things by far the majority of them agree that free trade is beneficial.

Read The Case for Free Trade (Browser back button to return to site)
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