Dubai

Wonder what the problems in Dubai will bring? This is the best answer I’ve seen so far.

Competition & Lobbyists

Something else to be thankful for: this article forced me to re-visit some of the wisdom of Ludwig von Mises. Mises pointed out that in market societies, businesses compete with each other by offering better or cheaper goods and services. The alternative is for businesses to compete by courting the favor of those in power. We are seeing much more of the latter. As government takes greater and greater control of the economy, it is natural to expect businesses to spend more energy on lobbying and less energy pleasing consumers. Whatever the benefits of regulation might be, the downside is a reduced emphasis on improving conditions for consumers and an increased emphasis on lobbying. This is why, despite all the anti-lobbying campaign talk, the Obama administration has seen the great boom in lobbying.

 

Starships

And now for something completely different: how to build a starship – as well as some ruminations about the nature of the universe.

Penny Wise

Megan examines the AIG pay controversy. Our government seems willing to risk billions in order to save millions. The Brits have a saying: “penny wise and pound foolish.” That seems to describe the situation quite well. How did our ship of state become a ship of fools?

Organizational Capital

There’s been a lot of discussion of “organizational capital” recently. Here’s a good place to start. If you don’t have the time or patience, here’s my summary:

Businesses invest in themselves to ensure future profitability. One form of investment is “organizational capital”. This is an investment in intangible procedures such as a new inventory management algorithm. Organizational capital investments sometimes yield greater returns that traditional capital or labor investments. Recent technologies have made some new kinds of procedures possible. Businesses may have new high return investment opportunities superior to traditional capital and labor investments. This would be bad news for some parts of the economy and good news for others. It also raises a host of interesting questions for economists and business theorists.

On Time, Margins, and Friction

Barry Ritholtz has one of his best blog posts ever. Mr. Ritholtz makes some interesting points that seem partially self-contradictory. Nevertheless, the points are all true. How can this be? Let me offer three explanations:

1. Things change over time. Ritholtz says that sometimes “people behave the way they do because they have figured out a problem and are responding to it intelligently”. But the “figuring out” is not instantaneous – it takes time. Time also allows us to become accustomed to new conditions. As Ritholtz says, “the US consumer is no longer frozen like deer in headlights.”
2. Things change at the margin. Everyone doesn’t figure out a problem at the same time nor become accustomed to some “new normal” at the same time. This is why stock markets resemble the action of “10 million panicked monkeys”. Since there are always new problems and new conditions, there are always some who reach correct conclusions before others.
3. Change has a cost. Transaction costs can be high – there’s a lot of friction in the world. We teach introductory physics using a “frictionless world”. We teach economics the same way. Those frictionless models are not robust enough for the real world. Bridges collapse and markets go haywire. We understand friction in physics better than we do in economics.

Being mindful of these three things will change how you view a lot of things.

Over The Cliff

People are gradually becoming aware of the coming fiscal disaster. Articles like this help. There was a time when I would have wondered how Washington in general, and the White House in particular, could be so tone deaf to the rising discontent. Why focus on health care reform knowing that it will make things worse? I wonder no more.

I heard someone on public radio offer a great explanation of why our political system is so dysfunctional. It has to do with our candidate selection. Whether candidates are selected by primary, caucus, or other means, only a tiny number of people are involved. The people most motivated to participate are those most dissatisfied with the status quo, i.e. people out of the mainstream. People at the political extremes are unusually influential in selecting candidates, working for campaigns, and donating. That’s why we’ve moved toward a political system of extreme views.

I wonder what happens when there is broad based disgust coming from the electorate. Actually, I doubt that much will change. Given two extremes, people’s choice will be to vote for the candidate who is least odious.  I sometimes think we would be better off having representatives selected the way we select jurors – at least we’d get a few moderate common sense types.

Meanwhile, all we can do is sit back and watch the current crop of buffoons drive us over the cliff.

Buying A Vote

I saw the story here. I suppose this kind of things happens all the time, but I don’t think it happens on this scale. When one Senator offers another a $100 million indirect bribe, it’s time to believe that things have turned really foul. I thought the Bush-era Republicans were pretty sleazy, but the Democrats are setting new lows.

Credit Reform

While it is absolutely true that credit card issuers maximize their returns through hefty stealth charges, and payday lenders charge absolutely rapacious interest rates, it is also apparently true that these awful loans often help avoid even worse fates.  And I don’t see any way to cut off the credit to people who are ignorantly or irresponsibly getting into trouble, without also cutting it off to a bunch of people who need it.

via On Poverty, Interest Rates, and Payday Loans – Megan McArdle.

Read the whole thing for a fascinating look at the situation regarding credit for the working poor.

As with so many things, the current state of credit results in social ills and social benefits. The ills are obvious, the benefits are not. Yet evidence suggests that the good far outweighs the bad.

Reformers, blinded by outrage at the ills, ignore the evidence and want to force changes which will avoid the ills. Those changes will also undo the good.

Good intentions are no substitute for clear thinking.

How The Free Market Works

This student essay is so good that I’m putting it in my Hall Of Fame.