Our washing machine now makes a noise like an angle grinder. It started doing it two weeks ago and the spin cycle requires us to vacate the house or risk our eardrums.
This cannot last, so after ruling out repairs (it’s quite ancient) we are thrust into the market for a replacement.
I have some experience in the washing machine market. I bought a second-hand unit for under $200 a few years ago. It caused regular flooding and I came to know its innards closely as I pulled it apart and refitted the drainage mechanisms every other weeks.
I want a brand new machine, with warranty. How to choose?
My partner had a simple decision rule. Buy The Best. She fixated on a German brand, Miele. I was all for it until I heard about the $1500+ price tag.
I had a more complex decision rule. Satisfice by balancing off energy and water efficiency, online reviews, price, etc.
We had some stern discussions about whether “value” might mean replacing a washing machine again in seven years time.
In some ways my decision rule was worse than hers. It doesn’t simplify the question very easily. It doesn’t rule out enough to get me toward an answer.
In the end, we settled this the old fashioned way: We had someone who subscribes to CHOICE email us the guide to Washing Machines, picked the top recommendation, then Googled until we found a retailer offering a good price.
CHOICE is a body that compares products for consumers. The fact it exists points to a real problem in our economy. As the range of things on offer explodes, we increasingly cannot tell them apart.
Don’t blame the companies that sell and market these things…
The problem with our economy is us. We buy products when we don’t understand the benefits. We are easily convinced that the benefits the product spruiks are actually the benefits we seek. We substitute decision rules (aka heuristics) for actual analysis.
Do I want to Lie Flat on the way to Perth? Do I want to Control my Income using Annuities (to take just two examples from ads in a magazine I have here)? How can I know if some other aspect of my trip to Perth or my income is more important?
Smart people recognise that they can’t be sure of what they want, so they outsource the making of decision rules. That’s where CHOICE comes in.
But really, it’s just more mauvaise foi. We tell ourselves that the criteria Choice uses are the important ones. That the way they balance those criteria are the right ways to balance them.
We can never know in advance if a product will be right for us. Whether it’s a chicken sandwich or a four-storey house in Mayfair, we buy with our eyes closed.
This would be fine, if we recognised the issue. But consumers are sure they know. When we make a heuristic that says – I buy this brand of muesli because I got it last time, we don’t admit “the benefit of finding a better muesli is worth less to me than the cost of searching.” We say: “This is my favourite.”
We refuse to admit or acknowledge the doubt around goji or chia seeds or whatever, because the certainty of buying and eating them is so much more appealing. The problem with the economy is us. And there’s no real chance we are going to change any time soon.
As for the Washing Machine, in the end we chose the Bosch WAP24160AU. Fabian from the Good Guys in Preston is going to fix me up with a great price.
“Good decision. It’s the best machine there is,” he said.
Tony Abbott is floating a special deficit tax. If you earn over $80,000 you’ll be up for an extra $800 in tax next year.
Here’s four reasons it’s a bad idea, (and one reason it’s not so bad).
1. We do not have a Budget Emergency. Yet. Our deficits are small and our debt is manageable. What we do have is a looming structural trainwreck as health spending rises while labour force participation falls. A short-term Budget deficit tax fixes the non-problem, while ignoring the real problem.
2. Raising taxes while the economy is in poor shape won’t help the recovery. Australia’s growth has been meagre and our unemployment rate rising for most of the past few years (with a blip down in April’s numbers). Smart economics says to spend more and tax less when you’re trying to induce a recovery. This is Keynesianism.
4. If we are so allergic to a deficit of a few billion, we may never borrow again. With Australia’s long-term government bond rate at 3.93 per cent, borrowing is cheap right now. If we are ever to build any infrastructure round here, we need to borrow money. (Infrastructure costs a lot now and pays off in the long run, so if buy it using cash current generations subsidise later ones). Insufficient borrowing will mean the country comes crumbling down round our ears.
5. It’s hard to imagine Treasury proposing this idea to the government, except perhaps as a second-best alternative to slashing a lot of programs, and only if the government was hell-bent on returning to surplus immediately. Where you do discern the fingerprints of the department is in the progressive design of the tax, that would mainly slug high-income earners:
Hitting the high income earners may work for Mr Abbott politically too. He hurts only people who are likely to vote for him anyway, keeping western Sydney sweet. That means the people with the highest tendency to consumer their income won’t be hurt, so the economic effect of the tax will be more muted than if it were shared equally.
Google released a new smartphone game called Ingress late last year.
It’s extremely sophisticated, and very addictive. But it’s also very off-putting and not that popular.
Let me explain.
I downloaded the game knowing nothing about it . I was looking for a puzzle game to occupy a few neurons, and the Google Play Store suggested Ingress.
I opened the app and it said to navigate to the nearest “portal.” “Walk,” it told me. I tried shaking the phone, dragging the icon, double-tapping, everything I could, but I couldn’t get my icon to move.
Then a realisation dawned. Walk meant walk. It wasn’t really a puzzle game at all.
The game is an augmented reality game, built on top of Google Maps. You have to move around in physical space to play. Part of its appeal is getting people out there in the world interacting with “portals” that are almost always on public art or historic parts of the city. There’s an elaborate back story about exotic matter spilling into the universe.
But the game is dreadfully designed for mass-market impact. It is absurdly complex and hard to learn. In the first hour I played it, I twice put my phone back on my pocket out of frustration, swearing to never again play. (Obviously, these sworn oaths wore off).
It’s a team game. The portals I mentioned have two functions. First, you use them to get items you need to play. But second and more importantly, you can convert the portal to your team. There are blue and green teams and they compete to capture these portals.
My computer-game obsessed friend (who works for a computer game company and spends his life playing games) says he finds it not too complex. But I took a couple of days to feel like I knew what I was doing. Then it took over a week to no longer make mistakes. It does not fit the chess mould of “a moment to learn and a lifetime to master.”
There are six different actions you might take at a portal (hack, deploy, recharge, mod, link, fire). There are also around 40 different items you can collect from a portal, and rules about how and when you may use them. The game grows even more complex, verging on annoying, when you first try to learn how to link portals to make some “fields”. (Ostensibly this is the primary goal of the game.) Check out this YouTube video on field theory if you want to be put off forever.
The language of the game is wholly foreign too. You need to learn about resonators, XM, AP, XMP bursters, multi-hacks, glyphs, and portal keys. The way they all work is not intuitive. Once you’re over the learning curve, of course, these are terrific fun. But that curve is very steep and the language is off-putting in another way.
The game is inherently nerdy. The set of people willing to scale the learning curve will be limited to those who are interested or experienced in gaming and science fiction.
Trying to describe the game dynamics to others has led to a lot of blank stares (blank with judgmental characteristics). Just the words “hack the portal” are enough to turn 99 per cent of people off. But the fundamental concept of walking around, visiting new parts of your neighbourhood and capturing territory is something that could appeal to anybody, young and old, male, and even – wait for it – female.
All this is relevant because the game works best – is most competitive – when there are lots of players. This is a concept known as the Network Effect. As the number of people involved in a network rises steadily, the usefulness of that network rises exponentially. The game at the moment – in Melbourne at least – is a little static and features a few names popping up time and again.
Google could win over a lot more players quite easily. And that’s why this blog post is more than just a whinge on a fringe topic, but an idea that could be quite powerful.
Imagine an interface for Ingress that, instead of Enlightened vs Resistance, was Kittens vs Pirates.
Instead of “portals,” you’d have castles. Instead of “hacking” you’d “visit.” Instead of links, you’d build walls and instead of fields you’d build Pirate Lairs or Kitten Sanctuaries.
Instead of “resonators” you’d have kitten guards, to guard your kitten castle. Weapons would not be XMP bursters but a sardine catapult, to distract the kitten guards. Make the graphics cute and that would also go a long way to giving the gameplay more appeal.
The game mechanics needn’t even be simpler, because the familiar and more welcoming tropes would help people come to grips with them. This would be an example of Skeumorphism (like using a picture of an envelope to represent an email). A proven technique for acclimatising users to a new interface.
If Google brought this in as a new “skin” for Ingress they could break into larger demographics. The best part is that they would not have to lose the original skin. The two games could be wholly integrated. The original players could still see Kitten players as Blue and Pirates as Green, and have no idea they played the game quite differently.
If that helped broaden the appeal, even more skins could be launched. Beatles vs Rolling Stones. Manchester United vs Barcelona. Plants vs Zombies, or Democrat vs Republican. Whatever. The bulk of the coding work must be in the game mechanics (which is excellent and rarely crashes). I’m sure inventing a new interface would be a relatively minor challenge.
The concept could be extended to other areas in which big data might be useful.
A game that entices people to submit driving data, for instance, diet data, or maybe shopping data. You could multiply the number of interfaces available until you have a good sample of people involved. Games work beautifully for data collection because they are wholly opt-in. Companies or organisations that want certain demographics to do so could tweak the front end until they find a recipe that lures them in sufficient numbers.
I’ve written before on the National Broadband Network, under the following headings: National Broadband needlessness. National Broadband Nuff-Nuffs.
I believed the cost of the NBN was too high, the case for it had not been made, and the idea of rolling out fibre to every premises failed to recognise the differences in need between certain types of premises.
Also, I wrote this:
“I think there is a cap on how much data we can consume. No doubt data demand is increasing. From 286 MB/month in 2000 to 14,909 MB / month in 2009. But this is a result of moving real-world activities like photos and video onto the internet. YouTube’s audience is double that of the three big channels broadcasting US prime-time TV.
Data demand is limited by human constraints. Pixel demand is limited by the size of screens we can fit in our homes, audio quality demand is limited by our hearing and demand for video is limited by the number of waking hours in the day.
Camera megapixels are a good example of this. For about five years after the advent of digital cameras, the number of megapixels available grew exponentially. But then it plateaued at about 10-12. For the majority of people the marginal benefit of more and more data wasn’t worth it.
Similarly, telephone call sound quality is abysmal and noone cares. Most of the value is in the existence of the link not the quality.”
Well, the data is in, and while I hold fast to my fundamental point about eventual data satiation, that point looks far away. Data demand is nine times what it was five years ago.
There’s another point to make too. Both this data set and my analysis above are obsessed about downloads. But that’s not the only thing that happens on the internet these days. User-generated content is becoming more important.
It was not until I started making a bit of video that I understood how very very poor upload speeds are. The NBN as imagined originally would offer much better download speeds.
I still believe that the NBN should be subject to a proper cost-benefit analysis and weighed against other investments. It may be the NBN has an extremely positive return but still yields less than public transport investments. In which case we should probably reconsider our aversion to debt.
Also, this argument still stands:
“There’s a big difference between giving hospitals and the square kilometre array incredible internet speed (8 tbps!), and giving incredible internet speeds to every terrace house, flat and bungalow in postcode 3068. Where productivity demands better internet access, users should pay.”
But the idea that data demand won’t create need for the NBN, I concede, looks wrong.
How would you like to pay $1000 now for an iPhone 10 in 2020?
You’d have to deal with not knowing if Apple will still exist as a company then, if smartphones will still be a thing, and if they will be delivered on time and even have the promised features.
That’s the sort of decision a country faces when it buys a warship or fighter jet.
They commit to the delivery of an extremely expensive product – often a ship or a plane – before it has even been properly invented.
But if you get a smartphone, you at least expect to use it as intended.
There’s every chance that we will have our defence materiel for a 30 year lifespan and never even find out if it does what it says on the box. We sent some bombers to Vietnam, but the only Australian fighter jet action since the Korean war was 14 F/A -18 Hornets that dropped 122 bombs in the first Iraq war. The rest have been limited to training and ceremonial runs over the shrine on Remembrance day. (source)
One of the most interesting economic decisions a country can make is spending its defence budget. At around $7 billion a quarter it’s a similar amount to what we spend on home renovations.
We’re buying safety. But without ever knowing if we needed to spend it to feel safe.
On my very first day at Treasury, in February 2005, I went to my very first meeting with two colleagues from the National Security Unit.
Two senior air force men came to brief us on project AIR 6000. The Joint Strike Fighter. The project was then listed as 100 jets for $12-16 billion. They assured us everything was going well. I remember my clever and apparently prescient older colleague asking tough questions about whether locking ourselves in to Lockheed Martin was such a wise idea.
Treasury did Defence advice. Every time a submission went to cabinet, we got the chance to make formal comments. In one way, the merit of getting Treasury involved is a scarecrow effect. It makes Defence behave better just knowing we were there. We did a lot of analysis but rarely had any real wins as the Howard era coffers overflowed and the procurement juggernaut rolled on.
Just yesterday, the Abbott Government announced it would spend another $12 billion on the Joint Strike Fighter jets, taking Australia’s total purchase to 72. That is fewer than was slated to be bought in 2005 and I see the fingerprints of my Treasury colleagues all over the decision. Kudos to them.
Defence procurement has always been a basket case. Traditionally the US makes its own things with great difficulty then sells them to us. It bears the development costs and we then pay through the nose. Or we make our own things with great difficulty (e.g. those damn subs).
The plan of the JSF program was to re-imagine the procurement process, by having a jointly developed platform owned by all western countries. It would share development costs and thereby reduce the risk to any one country. And everybody got to share in the supply chain, which meant local jobs.
It was just an idea. The risk was a lack of fall-back options. That would mean Lockheed Martin could get away with doing a bad job. That risk was identified and managed eight ways to Sunday with clause upon clause. But clearly no clause is as powerful as the threat of competition.
Is the JSF even a decent plane?
The point of JSF is not that it is agile. It is also not meant to be fast. The F-22 could kill it in a dogfight. Our old F-111s could beat it in a straight line.
It was supposed to deliver superior results by being really sneaky. Low radar profiles meant it could get very close to radar stations before it showed up.
That was combined with high-quality sensors that meant it would discover and network information. So not just one pilot knew where the missiles were coming from or where the bad guys were. Every pilot did. It was not supposed to ever be in a dogfight, because it was meant to shoot before the other plane was in sight.
Is that strategically wise? That is a hot topic. I am not an Air Force pilot, but the thing about a procurement program is that the parameters are set by air force experts. They know what they think will make them feel safe behind the joystick, and go buy it. I am not going to second guess that judgment here.
(Obviously, they set project parameters in 2002, and it’s now 2014 and other countries powers have increased. But that is not an issue just for JSF. It is an issue for all defence projects, because the world moves fast…)
Spending money on defence is difficult. Nobody, I think, would argue we should spend nothing.
But given our island location and our fairly un-strategic location on the way to nowhere, do we really need to be 13th in the world for military expenditure? As for Tony Abbott’s plan to lift expenditure to 2 per cent of GDP, that seems wasteful and quite backward. Should we not think about what we need first, rather than first thinking about how big our budget is?
I’ll leave you with this quote:
“A famous maxim in Australian defence circles is that “strategy without funding is not strategy”. … A reversal of the same maxim also applies to Tony Abbott’s new white paper. Funding without strategy is still not strategy.” (source)
Let’s look at what the damage will be in 2035, when we’re a lot older. It may shock you.
A pie and a soft drink at the football?
I paid $14.40 for a Four’N Twenty pie and a bottle of Sprite on the weekend. The inflation rate for Food and non-alcoholic beverages over the last ten years has been 2.9 per cent a year. Applying that to the next 20 years means that by 2035, your half time snack will be a whopping $26.75.
If you want the exquisite contemporary Australian experience of drinking a bottle of Crown Lager at Federation Square, you now pay $9. The inflation rate for the Alcohol and Tobacco index over the last ten years has been 4.6 per cent a year. Applying that to the next 20 years means in 2035, the price of the beer will be $24.
A ticket permitting two hours of travel on Melbourne’s ‘world-class’ public transport system costs $3.58. The inflation rate for transport over the last ten years has been 2.3 per cent a year. The lowest rate we’ve seen so far. Applying that to the next 20 years means in 2035, a ride on a tram will cost $5.87.
A pair of ASICS Gel Kayano running shoes costs $250. In 2035 that will be $235. Wait, what? Yes, it’s not all bad news on the inflation front. Some things have fallen in price in the last 10 years, especially clothing. The average annual price change in the last decade was -0.4. There’s more detail on this in a post I wrote a couple of weeks ago.
I just finished reading the Hunger Games (book one). I enjoyed it for a reason that might be unusual. It brought back vivid memories of my first-year economics textbooks. To me, the Hunger Games is clearly a secret primer in basic economics.
The free-market lessons kick in on page five, when Katniss – the heroine of the book – ducks under a fence to go hunting, in defiance of the rules that govern her district, which is both starved and ruled with an iron fist.
“Most of the peacekeepers turn a blind eye,” she explains, and we learn that a thriving black market – the Hob – is what keeps Katniss and family alive. Every time she hunts and then sells her kill Katniss defies a death penalty that prohibits trading.
LESSON 2: Central planning and colonisation are bad
The district itself is run as a sort of colony of the Capitol. The Capitol is the centre of a future North America torn apart by climate change.
The district where Katniss lives specialises in coal-mining. The citizens of this colony have no control over the coal production. They are forced to mine and send the coal to the Capitol. They are prohibited from engaging in commerce or choosing their fates. The result of their lack of freedom of choice is made clear in the first part of the book:
“Starvation’s not an uncommon fate in District 12,” says Katniss on page 28.
The parallels with the colonisation era of the 1800s are clear. The lust for cheap raw materials and labour makes the keeping of colonies highly advantageous. But the citizens have to be oppressed for colonisation to work. Katniss can’t bring her bow and arrows inside the District, because the powers that oversee it fear an uprising. The trade between the district and the capitol is anything but free. You know who else opposed colonialism? The famous economist Adam Smith.
Few services are provided from the capitol back to the colonies. Colonies get some supplies of oil and grain , a few hours of electricity a day, and TV broadcasts that are more like propaganda. When Katniss gets on a train to go to the Capitol to compete in the Hunger Games, it is the first time she has been on any motorised vehicle.
Then, for a while the economics lessons of the Hunger Games become less about the virtues of free markets, and zeroes in on a particular micro-economic concept:
LESSON 3: Game Theory.
The dynamics of the Hunger Games are brutal. The Capitol forces 24 children from 12 districts into a gladiatorial battle to the death.
Lesson 3.1 Go to the cornucopia?
To start the game, the contestants enter the arena simultaneously, but at a distance from each other. Then they face the first complex and interdependent choice. The centre of the arena (the cornucopia) is filled with useful items. Weapons, food, shelter.
In the short-run, nobody is armed, so going into the centre is risky. It may be worth it if you can defend yourself, so the biggest, strongest players have the incentive to head in to the centre. But it may also be worth it if you think you have no chance without supplies.
Of course, if the weak players yield the advantages of the stash to the strongest players, it makes their job even harder. So some take the risk. Even Katniss. In the end the stash of items is the scene of several quick deaths.
Lesson 3.2 Form an alliance?
The stash of supplies is too big for one player to control, and so the biggest players form an alliance.
The existence of an alliance among the strongest players in the Hunger Games may seem surprising. Any alliance must eventually break down – it is after all a battle to the last man standing. Game theory suggests breaking an alliance earlier rather than later will always be advantageous. But the presence of a stash of food binds them together. They need to be able to have some people sleep while others defend the stash.
If the alliance between the strong breaks down before the stash of food is depleted, the one remaining owner of the stash will be unable to so much as sleep, or risk becoming a target of remaining outsiders. The stash itself is an x-factor that binds that alliance of the strong together, so long as it lasts.
Social factors can also influence the outcomes of prisoners dilemma-style interactions, which can explain a couple of alliances Katniss enters into, especially the one with Rue. Katniss simply likes Rue.
She likes Peeta too, but he is less useful as an ally. As if aware of the implausibility, the alliance of Katniss and Peeta is maintained by a steady stream of rewards that arrive. The payoffs to staying together are higher than the payoffs of moving apart.
Lesson 3.3 Run and hide?
The Hunger Games reward survival, not killing. The optimal strategy at the start of a game is obviously a defensive one. Let everyone else try to kill each other and just wait. It’s only optimal to choose to enter a battle later, when there are fewer than 24 opponents, so as to minimise the chance of stumbling upon someone whilst sneaking up on another.
For that reason it is no surprise the “Gamekeepers” unleash a massive fire on the unsuspecting players very early on. This makes sure hiding is very difficult. The action cannot be allowed to ebb, after all.
Lesson 4: Prices.
Contestants can obtain items from “sponsors”, which are delivered to them in the Game. Later in the game, the price of items goes up dramatically. If we assume sponsors want to help the eventual victor, this makes sense.
Gifts delivered late in the game when few survivors remain are likely to be more effective in securing a win than those delivered early on. So gifts delivered in the last phase of the game are most valuable .
The book is a sci-fi fantasy and I do not expect it maintain perfect adherence to economic incentives. Two examples stand out.
1. Tesserae. Children from Districts can increase their chance of being selected as a Hunger Games participant in return for a year’s supply of grain and oil.
From the kids’ perspective I understand it wholly. But where’s the upside of this to the Capitol? It doesn’t yield more participants, or more interesting Hunger Games. It probably just costs them more in oil and grain. We are told the point of the Hunger Games is to keep the residents of the capitol amused and the residents of the districts poor and weak. The Tesserae don’t really achieve either of those.
2. Careers. The book wants us to believe that the Hunger Games are dominated by “career” competitors that volunteer to enter and almost always win. But it doesn’t seem plausible.
In the Hunger Games of book one, there are around six “careers.” Each must have an eighteen per cent chance of winning, assuming the rest of the contenders have no chance. For each of them, the risk is too high and the rewards too low. Especially when you consider that the reward of winning is supposedly food and housing, and the “careers” are described as being from “wealthier districts … fed and housed throughout their lives for this moment.”
Given the chances of winning are so low and the upside is slight, the optimal solution for any one district would be to send their weakest, least valuable members.
Big questions about the merits of economic growth.
The Hunger Games also raises very interesting questions about the end-point of economic development.
When Katniss first arrives from the districts, and meets the surgically altered citizens of the Capitol, and eats the endless supply of bountiful food, she asks an important question
“What must it be like, I wonder, to live in a world where food appears at the press of a button? How would I spend the hours I now commit to combing the woods for sustenance if it were so easy to come by? What do they do all day, these people in the Capitol, besides decorating their bodies and waiting around for a new shipment of tributes to roll in and die for their entertainment?”
Katniss wonders what her identity would be without having to provide for her most basic needs. I think that question haunts a lot of people in the privileged parts of the world. We have all the food we need and much much more. Our lives are about comfort, not survival.
I suspect this sense of meaninglessness is why some affluent people seem to spend a lot of time on their vegetable gardens.
The question of giving life purpose is likely to become only more relevant as production of food, clothing and shelter become more efficient. When people’s economic contribution is less and less crucial to survival – making ads, doing graphic design for t-shirts, doing accounting, they may begin to wonder what the real point of wealth is.
I am eager to get into Economics 201 – by which I refer to Hunger Games book 2. Will we see a process of revolution and decolonisation that allow market forces to deliver the districts into a state of freedom? Will there be a surge of immigration to the capitol? Will the book explore the macro-economic implications, including on prices and wages? I can hardly wait to find out.
The internet economy is developing before our very eyes. Is it a gold mine? Looking only at the Silicon Valley Ferraris, you might conclude yes.
Or is it going to destroy value and jobs everywhere? Looking only at the newspaper industry you might conclude that every job that involves storing, processing and weighing information – from lawyers to bankers, doctors to teachers – is in deep trouble.
The internet reduces a lot of costs. As consumers we are comfortable with the concept of zero marginal costs. We breathe the air, look at the views, bask in the sunshine.
But as producers, as workers, we get worried. There are no jobs in the “Air Industry.”
The internet means a lot of work is about to be done at zero marginal cost. You build a system that teaches kids their time tables, you can roll it out across the English-speaking world. Teachers quake. Build a system that retrieves data from legal cases and roll it out across the jurisdiction. Lawyers will quake. Build a system that uses symptom data to develop diagnoses and hospitals will take it up while Doctors rend their garments.
But all this is a long way off.
For now, the internet is a lot simpler. The only industries that have been transformed so far are ones where data is simply displayed, not manipulated. Industries like advertising.
Google shows you ads all over the internet – in your email, when you surf the web, etc. And this transformation has reaped it a large and growing pile of money.
Google revenues have fallen in all categories in the first quarter of 2014.
Of course Google is still profitable, and Q1 2014 beat Q1 2013, but the movement in the trend provides another data point to support the second hypothesis above, that the internet-isation of our economy will not involve a lot of money.
The internet is just a distribution mechanism. Making information for distribution still takes work, at least for now. But economic theory says the cost of a good will fall to its marginal cost. The predictive power of economics is pretty impressive when you look at how many newspapers are free, how many TV stations are free, and how many movies get pirated.
Whether companies will find ways to get people to pay for information products is an open question.
But if the “zero marginal cost” feature of the internet economy proves to be decisive, investors will lose a lot of money. Evolving views on this “big question” may explain why the Nasdaq – the technology stock index – surges and falls with more volatility than other bourses.
Some investors clearly already worry about the profitability of technology companies.
But money is not everything. The world in which zero marginal cost is decisive could be a good one.
Imagine if air was made in big O2 factories, and you had to buy a subscription. Would you be better off, or worse off?
So it could be with a lot of technology. We may be better off in an economy where there are slightly fewer jobs but much more that you can consume for free.
Even if the robots don’t get up to scratch and we need people to make information products for free, will we be able to expect them to do so? Let’s look past the evidence that they will (YouTube, blogs, most short films, most bands, Open Office, a lot of apps, Wikipedia, etc.) to the theory.
The concept rests on the idea that people have a “cognitive surplus.” You can meet your basic needs (food / housing) without using up all your week. Then you have time you can spend doing things that look like work.
This cognitive surplus may come in a certain phase of life. You may be a child or a student or retired. Or you may have a cognitive surplus because you work part-time, or because you are still full of beans in the evening when you get home from your “real” job.
The you use that cognitive surplus to do things that look, to the outside observer, like “work.”
The fact that a cognitive surplus needs to be defined and explained, really shows the incredible power of one of economics simplest models: breaking your day up into Leisure and Labour.
The model is pervasive. People use it to do all sorts of calculations about how much they should pay to save an hour of leisure, etc. But it’s also kind of stupid. Commuting is neither leisure nor labor. Neither is washing your work shirts. The category of unpaid labour is invented. For washing the floors, sure. But does it include baking a cake? Digging in the garden? Building a treehouse? You can enjoy unpaid labour.
But a zero marginal cost economy won’t wreck the whole economy. There will always be plentiful jobs in things that are not zero marginal cost. Humans need food and housing and transport and always will.
If you’re worried about the rise of the internet, invest in something concrete. Like iron ore mining, or potato farming, or logistics. These industries will continue to sell things, hire people, and make money.
I learned something surprising about Google this week.
Their spam-filtering software lives an amazing double life.
I’ve known for some time that if you fill in this form (to post a comment on a blog, or whatever), you need only type the number on the right – it will ignore the number in the photograph. That was perplexing.
Then I discovered Google is using us. When you type the number in the photo, that gets sent to Google Maps, where it answers a question being asked by Streetview – ‘what street number is this?’.
This is quite brilliant. They apparently also use this program, called ReCAPTCHA, to decipher words the software can’t untangle when scanning books. So every time you post on a blog, you’re contributing to the quality of streetview, or scanned books.
The idea is so clever that Google now has software that is entirely designed to trick us into doing work for them.
I am talking about the “game” called Ingress. I downloaded this last week, because it was free and the Google App store told me it was highly regarded.
I opened the app and when it told me I had to “walk” to achieve the missions, I started pinching the screen, tapping, even shaking my mobile device to figure out how to “walk.” Soon it dawned on me. “Walk” meant “walk”.
The app is designed to collect data on the walking distances, way-finding and walking time between landmarks, especially those which are in pedestrian areas not covered by the Google streetview system. (The game itself is pretty intriguing but also pretty confusing.)
The lesson of all this is the power of a big company – there are amazing things you can do inside a company that you couldn’t do outside.
Inside companies, exchanges are based on relationships, not market payments. Unless you get paid piece-work, you are rewarded for being there, not for every article you write, or every ministerial briefing, or every line of code. You do the work because they trust you to do it. You are getting paid, sure, but you trust that working hard now will lead to reward down the line. It’s not specified in the contract.
Every time a company expands, they are saying that they have more faith in using relationships to get the output of the people they just hired, than using the market. The reason is transaction costs.
While Google is tricking us into doing work for it via non-market transactions, Amazon is arranging to pay people to do similar work.
They have a “marketplace” called Mechanical Turk, where you can get stuck into the task of diong things computers can’t. Maybe selecting which photo of a landmark is clearest and best, transcribing some audio, or similar.
But there are many tasks, like completing surveys or any crowd-sourcing task, where low effort from lots of people delivers a better result than lots of effort from a few well-paid people. Google seems to have this figured out – the market is not always the best solution.
The Budget comes out on 13 May, and when it does, one thing is for sure. Everyone will get in a flap and a lather over the wrong things.
The Budget is a whopping lump of documentation, and many of the people sent to cover it are inexpert in matters fiscal.
So at the end of the day, an inordinate number of stories will be simply about “the deficit.”
It’s one of only a few simple numbers in the whole Budget. Earnings minus Spending, delivering a binary result: Surplus/Deficit. Good vs Bad. It’s quite graspable.
But it is very hard to find experts that care about each year’s budget deficit. (1, 2, 3, 4.)
Forecast deficits are more important, but the actions that need to be taken to get the ship in order long-term are often counter-productive if you want a surplus ASAP.
Stressing over one year’s budget deficit is akin to stressing about the score in a five minute period of a game of football. Sure, the end result is made up of periods just like this one. But experts understand that the game turns over a longer period than just five minutes.
Sometimes you are kicking into the wind, and a deficit score can be okay. Sometimes you run a deficit on purpose, to prop up the economy or grease the wheels of reform.
Headlines that scream Deficit! and Surplus! – complete with a cartoon of a treasurer either pulling out his pockets to show they are empty, or otherwise evilly grinning and hoarding cash – would be better spent focusing on what matters.
The way to train people’s focus onto certain matters is to measure and report them.
“If you can’t measure it, you can’t (media) manage it,” as they say.
Labor had the opportunity to remake the focus of the Budget, but lacked the foresight.
They could have put the budget balance in size eight font and tucked it away down the back. Obviously you can’t take away the food bowl and expect the media to sit there wagging their tail. You’d need to give them something else.
Politically speaking, this last one might have been quite useful.
The Australian economy has been characterised by a fall in the compensation of employees (COE), relative to profits.
The National Accounts, from where these graphs come, note: “The profits shares recorded since the late 1980s are at a distinctly higher level than those reported at any time since 1959–60.”
I do not suggest that at the moment there is a crisis in equality in Australia, but I suspect many people think Australia could do better. And there is a choice to be made as Australia equips itself with policies for the next decade. Do we want to be Sweden or America?
People realise policies that promote freedom and small government can lead to inequality of outcomes. Mostly they accept that, until the inequality is bad enough to undermine the society expected to enjoy that freedom.
In the US, inequality is so bad that Walmart now is forced to declare as a material risk to its earnings, any changes to Government welfare cheques that would further impoverish its customers. (from the Wall Street Journal).
The Budget is the best time to try to introduce a new concept or issue into the economic debate, because that is when the greatest number of Australians are paying attention. Using the budget to shape the environment in which economic policy is played is going to yield better long-run outcomes than playing another round of The Deficit/Surplus Game.
Even if the other side gets back in and removes that statistic from the Budget, the public – by then attuned to expect this data – gets the sense the new team is hiding something.
In the rain on Wednesday night, I got a cab home from the city – a $15 fare. Near my house the driver had to turn from a busy road into a side street, across oncoming traffic.
As the windscreen wipers flicked back and forth, the oncoming headlights of a bus distorted into a kaleidoscope of colour in the raindrops. At that exact moment, the driver took his foot off the brake and began to make his turn.
Every muscle in my body tensed and I opened my mouth to shout something, but then he stopped again. The bus had to swerve past the yellow bonnet of the car. Once it was gone the driver proceeded.
And I’d rate this guy as one of the better drivers I’ve had in recent times. At least he didn’t drive on the footpath.
The government is proposing to raise flagfall from $3.20 to $5.20 after 5pm and to $6.20 on Friday and Saturday nights.
The market for taxis has long been a mess. A big part of the problem is the lack of actual market forces. The industry has long been regulated to within an inch of its life. The biggest single rule has been a cap on the number of taxis in Melbourne, that drives up the value of a cab.
The licenses (aka plates, aka medallions) that permit you to have a taxi in Melbourne are worth hundreds of thousands of dollars. The owner gets half the money you pay. The value of the medallion exists only because the number of taxis is regulated.
One of the reforms proposed by the Victorian government’s taxi review was for the split of revenue to change from 50:50 to 55:45. A ten percent increase for the driver is hardly earth-shattering, but it has been opposed by the Victorian Taxi Association. That is the peak body for the industry. Unsurprisingly, it doesn’t effectively represent the users of taxis or the casual drivers. It is backed by the money.
It also opposed the big reform proposed by the taxi industry review, increasing the number of cabs in Melbourne. Despite its arduous work in representing the interests of the medallion holders, that reform has driven down the price of a taxi license. (In 2012, licenses were changing hands for as much as $500,000.)
The government has agreed to a clever approach – leasing 12 month taxi licenses at $22,000 a year. This price is indexed at below the rate of inflation. The eventual effect is that the price of a taxi license approaches zero, and the market is no longer held hostage by the medallion holders.
The other big change that is being stealthily introduced is deregulation of fares. Part of the problem is that a taxi is just a taxi. There’s no easy way to get a good one. No way to offer a better service and charge a higher price.
But in country areas, the government is introducing a rule that allows taxis to set their own fares. I see a link with today’s announcement. Might higher fares in the city build a consensus that really, deregulated fares are the desirable outcome?
The biggest player in this space is Uber. It started as a a way for towncar and limo drivers in the US to make money in their downtime, and is now available worldwide. The little car-hailing company that could is now worth an estimated $3.5 billion. According to their website, riding from my house to the city could cost as little as $10 and you might end up riding in a Prius or a Mercedes.
If they put our yellow cabs out of business, I won’t shed a tear.
Australians get through a lot of meat. The ABS released its meat and livestock series this week, and it caught my eye. Every month we kill and eat (or export) this many of the following animals:
I’m an ex-vegetarian.
So this is not a diatribe or an attempt to persuade you to stop eating meat. It’s an attempt to persuade you that economics provides ways of thinking about issues beyond what you may expect.
Meat-eating can be considered as an economic issue. There are externalities to take into account.
CO2 emissions is one (agriculture is omitted from our carbon tax). But another is the ethical issue of killing. That might not seem like an externality – it’s central to the process – but it is external to the market. There is no price mechanism that accounts for the slaughter of the animal.
If we model that as an externality, there are important differences in the number of kills per mouthful of meat.
Here’s the monthly tonnage the industry produces.
The result of that is that every meal represents a different amount of the externality in question.
This is important information. If we aim for a buddhist ideal of minimising killing, perhaps we ought to eat only very large animals?
But deaths are not equal. Even fervent vegans would place more ethical and emotional weight on the death of an elephant than a fly (I think).
What happens if we weight these creatures by their brain size?
(Humans, for reference, have brains weight around 1.4kg.)
In this case, the chicken races up the league table to be a relatively ethical choice. The sheep, with a modest body size for its biggish brain, becomes the least ethical choice.
Of course brain size is not the only measure of intelligence. (And intelligence remains a highly disputable way to measure the possible ethical externalities of killing animals.)
A few people I know are currently looking for work. I began to wonder if combing through advertised jobs is enough, and thought a little sample of my own experience might help answer that question.
1996. My first ever job was selling ice-creams at a festival in Melbourne called Moomba. I got the job through a friend’s dad. Pay and conditions were great. Ad: 0%. Luck: 0%. Inside running: 100%.
1998 After I finished school I got a job as a busboy at a cafe in a shopping centre. It wasn’t advertised but I handed my resume out to 20 businesses near my house and this one had an employee quit the next day. $8.50 an hour in cash seemed pretty good to me. Ad: 0%. Luck: 100%. Inside running: 0%.
2000 I became a waiter at Pancake Parlour. Pay was a whopping $7.27 an hour. It was an advertised job for which I went through a quite involved interview process. Ad: 100%. Luck: 0%. Inside running: 0%.
2001 Waiter at italian restaurant. Through a friend. I lasted about three weeks. Ad: 0%. Luck: 0%. Inside running: 100%.
2002. Market research interviewer. A friend who worked there told me the place was hiring. Great pay and conditions so I joined the union. Ended up doing market research for big tobacco, but I didn’t mind because smokers loved to chat about smoking. It beat asking people about banks. Ad: 80%. Luck: 0%. Inside running: 20%.
2003 I applied to an ad for an English teacher in the small town of Qinhuangdao, China, where I found I could go months without seeing another foreigner. Ad: 100%. Luck: 0%. Inside running: 0%.
2004. I parlayed my meagre teaching experience into a job as a tutor in the first-year economics subjects, which was among the best and most convenient jobs for a student ever. Ad: 100%. Luck: 0%. Inside running: 0%
2005. My first full time job. I became a graduate Treasury policy analyst, living in Canberra.Ad: 100%. Luck: 0%. Inside running: 0%
2005. Ski instructing at Perisher Blue. A week-long “hiring clinic” for which you have to pay hundreds of dollars serves as both interview process and training. Ad: 100%. Luck: 0%. Inside running: 0%
2008. Nauru budget adviser. I happened to have just finished my tutoring contract when I was asked by someone I knew in the federal government to come to an interview. I don’t think they interviewed anyone else.
Ad: 0%. Luck: 20%. Inside running: 80%
2009 Victorian government policy officer. Through a recruitment company. Ad: 0%. Luck: 0%. Inside running: 0% (I’d say it was 100 per cent luck but luck should be good and this job wasn’t.)
2010. Journalist at the Financial Review – I applied at a timely moment when a bunch of people had quit. But there was no job advertised and I had someone on the inside put in a good word for me. Ad: 0%. Luck: 30%. Inside running: 70%
2013 – Freelance writing. I sell things mostly to people I know from my other jobs, but also via some cold calling. Ad: 0%. Luck: 20%. Inside running: 80%
After having had 17 jobs, just six came from simply seeing an ad and applying. My crude averaging of the numbers (including some jobs I didn’t go into above) says ads explain 46 per cent of my jobs, inside running 32 per cent, and luck 22 per cent.
(I should note luck played a pretty big part in being born to a family that cared a lot about education and invested in my future. It also doesn’t hurt to be in a bunch of categories that are unfamiliar with the sting of discrimination. Is my experience strongly shaped by these privileges?)
Economic theory suggests a great benefit and a great cost. If firms are able to fill jobs quickly and minimise their search costs, that could be an advantage. But if it means they miss out on the best human resources, they suffer.
This expert recommends job hunters should spend: “20% of the time responding to job postings … another 20% ensuring your resume and LinkedIn profile are easy to find and worth reading, and the remaining 60% networking to find jobs in the hidden market.”
If my experience holds for everyone, its going to be advantageous to keep working in the same city, or at least the same country, where you have a bunch of connections. It also doesn’t hurt to be on LinkedIn.
But I want to know if the same is true for you. Have you got your jobs by responding to ads and going through rigorous processes? Have you been lucky? Made your own luck? Deliberately developed and used your networks? Please share your experience in the comments! (Look for the words “Leave A Reply” below)
We all know the feeling. You take your annual leave and go on a terrific holiday. Perhaps some cultural time in the capitals of Europe. Perhaps a noodle and beer-intensive tour of South East Asia.
Then you return to work. The swivel chair sits forlornly awaiting your return. Hundreds or thousands of emails demand your attention.
You dive into work with a mixture of novelty and regret – this used to be very familiar, you think, and now it is not. At least until around midday, when it will seem as though your holiday never happened at all.
Fatality risk increased for every day the surgeons took off between procedures.
In the study the mean mortality rate the first day after surgery was 0.62 per cent. Mortality rose by .05 percentage points for every extra day it had been since the surgeon held a scalpel. That is a 7.4 per cent rise in the risk of dying.
The study (Hockenberry and Helmchen) covered 56,000 patients and 188 surgeons and focused on a procedure called coronary artery bypass grafts.
Hospitals prefer doctors who do a lot of surgeries, because they are more effective. Surgeons who did more than 100 of the procedure per year had lower one-day mortality outcomes (0.52 per cent), but for them, time off was even worse. For every day of rest, the morbidity rate of their next surgery rose by .09 percentage points.
The doctors did not perform worse on absolutely every measure. When they were back from a break, they apparently sped through the surgery, using less resources. Each day off correlated with a fall in the cost of surgery of 0.6 per cent.
But the saving was well below the value of life lost. In other words, society would prefer the doctors to spend more time and money. The researchers theorise that the cost effect and the morbidity effect are related – relaxed surgeons with their brain still on the golf course are failing to notice important complications and therefore closing up when they should be doing more work.
“After temporal breaks, surgeons may fail to identify and treat life-threatening complications.”
The effect was stronger for surgeons if they had had a lot of time off from surgery in general, rather than if it had been a long time since they undertook the specific procedure being studied.
The effect requires more study before we can determine a policy response.
If the depreciation of skill happens exponentially the longer doctors are on break, we could encourage them to take several two-to-three day breaks a year, rather than one four-week holiday.
But if the depreciation of skill has a linear or decreasing relation to time away, doctors could be encouraged to take all their leave in a lump. General learning theory suggests most forgetting happens straight away, suggesting the latter solution would be preferred, but this study did not attempt to answer the question.
The research is part of a field of study that looks at human capital and how it erodes. It is well-established that the amount of time that elapses between repetitions of a task decreases the quality of outcomes.
This raises questions about a lot of training courses the modern office worker is encouraged to attend. Is the day off worth the meagre benefit if it also makes the worker less productive on their return?
The link between time off and productivity may also have negative implications for going part-time, buying extra leave, and taking career breaks. These issues are ever more relevant in the modern economy where parental leave is all the more common, where people change jobs often, and where jobs may encompass a wide range of tasks undertaken infrequently, rather than repetition of a few tasks.
There is room for a lot more research on this question, but for now, there is one clear lesson: Don’t choose a surgeon with a suntan.
People everywhere are spending far more on food than on clothing these days. And yet I don’t see people shuffling around in clothes that need repairing.
I had begun to suspect prices may have something to do with it, but the ABS inflation data for clothing was still a shock to me:
Despite a 10 per cent hike at the time of the introduction of the GST, the price of clothing has risen only 1 per cent since 1993!
I remember 1993. I was 12 years old. For the first time it was possible to buy a pair of Nikes that cost over $100. The last time I went and looked at Nike sneakers, the price range was roughly the same (and I picked up a pair from the factory outlet for $30). If they’d followed the inflation path of food and beverages, sports shoes would all be over $200 now. But they haven’t and they aren’t.
Why not? The answer is not on the demand side. It’s not that in two decades something fundamental has changed in the way humans wear clothes. It’s about the supply side.
And that’s what’s interesting about H&M. It owns stores that sell its own brand. It makes only very limited attempts to stock fancy Italian or American brands. A bit like its Swedish retail older sibling, Ikea, it is vertically integrated and tightly focused on cost.
I bought a terrific shirt at H&M’s Sapporo outlet 10 days ago, for ¥500 (A$5.50). Even on the discount rack that is an absurd bargain. Only after I got it back home did I think to look for this tag, and it was as I suspected.
There are moral issues when it comes to making clothes in Bangladesh. I don’t want the fact that this post doesn’t cover them to stand, in anyone’s mind, for the idea that they are unimportant.
The fact of the matter is that if you can control costs well enough, you can make big margins even as prices fall. That’s the difference between Myer and H&M. Cost control. Myer can’t do it so easily because while it has 66 stores, H&M has 2600. H&M can make or break people while Myer deals with suppliers that have options and won’t let their margins be crunched.
A quick look in the H&M annual report shows just how good those margins are. More than half of the average price tag is mark-up.
The H in H&M stands for Hennes (“for her”), the name of the original company that sold women’s clothing. The M stands for Mauritz Widforss, which was the name of a hunting apparel shop next door to the original Hennes, which H&M took over to develop a men’s line and become what it is today.
If you’re interested in knowing more about the business models of big clothing retailers, check out these very good Forbes profiles that highlight the differences between Uniqlo, Zara and H&M.
Like most people who care about economics, read about it or talk about it, from time to time people say this to me:
“I couldn’t get interested in economics. I just don’t care enough about money.”
They say it dismissively. As though economics was about money.
Economics is about people.
Take the latest work by one of my favourite economists, Professor Jeff Borland. He produces a “labour market snapshot” each month that he emails to interested parties. The April one was focused on the plight of the young.
“Employment prospect of the young in Australia have weakened considerably since the GFC,” he writes.
The biggest fall in employment is among those who are not in full-time study.
This is not an academic issue. It’s a goddamn human tragedy. Unemployment at this tender age correlates with worse outcomes on just about every measure.
“Unemployment while young can lead to long-term reductions in wages, increased chances of subsequent periods of unemployment and poorer health outcomes,” according to UK economists.
Brotherhood of Saint Laurence executive director Tony Nicholson: “And in our modern economy that means that they’re really being sentenced to a lifetime of poverty.”
This blog from the Peterson Institute for International Economics: “Considerable research suggests that less stable employment experiences of young people can lead to “scarring” that affects their future employment and earning prospects.”
The critics of economics implicitly accuse it of reification – that by creating ways of quantifying and measuring the material world they bring materialism to the centre.
There could be a germ of truth there. But to not study the material world in a systematic way would be to deny the real influence it has on humans’ experience of their lives.
Entrepreneurialism – it seems – is not about the wild frontier nor about libertarian values. The most entrepreneurial state in Australia is its most densely populated and most left-leaning (arguably).
The data comes from the ABS series Business Entries and Exits. They show not only that Victoria has (slightly) more businesses per capita than anywhere else, but also that it is extending that lead.
Is that surprising? Victoria is not only a wealthy state, which allows residents the opportunity to strike out on their own, it is also a beacon for immigrants, who often open small businesses. Also it has experienced a lot of structural change as manufacturing businesses close, forcing people to create new opportunities for themselves.
(Another point of note is how the ACT is a laggard for total number of businesses, but mid-pack when it comes to opening new businesses. I’m imagining a lot of senior public servants applying for an ABN as they prepare to lose their jobs and become consultants under the Abbott government.)
But historically, the ACT is the worst place to start a business. More than half of them disappear within a few years. In fact, Tasmania and SA, with their seeming reluctance to start businesses, are rewarded by having the highest four-year survival rates.
The failure rate of small business is not a mainstream topic of conversation. But I can’t help imagining all the life savings that get flushed away, and all the relationships that fail when small businesses disappear.
It’s the hidden underbelly of capitalism, in a way. We focus on the big businesses that put people out of work, but in those cases, workers have none of their own capital involved and governments guarantee their benefits. When your local milk bar goes down or a removals company runs out of money, nobody notices but the proprietors. They’re not just looking for a new job. They are dealing with the death of their dream. But nobody comes to interview them about their plight.
Governments go ga-ga over small business, calling it the backbone of the economy, etc, etc. But they are risky. The data show you are much safer working for or investing in a business with more than 20 employees.
But if you believe in yourself, the carrot is there. Last year, 27 businesses went from having no 1-4 employees to having over 200 in the space of one short year. It’s a bit like buying a Tattslotto ticket – it is unlikely, but just possible that you will have a very exciting result.
But the difference in prices between Australian cities is even bigger.
Sydney’s median price for an attached house was at Melbourne’s current level in 2003 and has risen from there. Melbourne was at Adelaide’s current level in 2007 and has risen. Taking this perspective would seem to suggest there’s nothing to stop Melbourne house prices from going up further.
Obviously there are constraints. Wages differences between the cities are real. This chart shows $/week in the capital cities.
But they are not as big as house price differences. (source: RPDATA)
House price to income ratios in these cities show Melbourne and Sydney are similarly “unaffordable” and in Adelaide things are a bit easier.
The fact that house prices can be so different in Australian cities hints at the truth. There is no “correct” level for Australian house prices. We cannot rely on history to say where they should be, neither can we rely on price-to-income ratios. In fact, the concept of “Australian house prices” is suspect. Housing markets differ wildly by location.