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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

At what cost?

Written by Victoria Buhler | Thursday 21 July 2011

sadWe often think of the dangers of central planning as an abstract loss of productivity rather than any concrete personal danger per se. However, as an article in the Telegraph this week demonstrates, oppressive regimes can inflict enormous personal costs on the individuals who become entangled in their overarching plans.

Zhang Shangwu, once a top Chinese gymnast, is now begging on the streets of Beijing. Shangwu was taken from his family at age five to a government run facility where throughout his childhood he trained. And trained. And trained some more. However, after snapping his tendon in 2002, Shangwu received a payout of £3,650 that relieved his local team of any liability and then sent on his way, despite having no tangible skills apart from in the world of uneven bars. 

The Beijing model of authoritarian government is sometimes praised because of the speed with which it can deliver enormous change. Indeed, New York Times columnist Thomas Friedman noted approvingly the “one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century”. Fundamentally, the Chinese government relies on the power of authoritarian rule, or rather the power of compulsion, to deliver results that the democratic models, with their endless checks and balances and respect for individual liberties, cannot match.

Just over a decade ago, the Chinese launched ‘Project 119’ – so named because it identified the number of Olympic medals available in sports that the Chinese had historically had less success, namely ‘athletics, canoeing, rowing, sailing, and swimming’. From beginning to end, the state plays a role in the cultivation of Chinese athletes. After being sent away form their families at young ages, the children put into what are effectively forced labor camps, where labor is rigorous and unrelenting practices. This kind of Soviet-style system had certainly yielded results: China is expected to carry a total of 83 medals in the 2012 games, right behind the US with a projected medal count of 84. Given that back in 1988 in Seoul, China only managed to win 28, this meteoric rise on the Olympic podium should be just as worrying as any South China Sea scuffles. 

Patriotism and a nation’s entire sense of self worth can be tied to their athletes' performance in the Olympics, with success viewed as validation of that country’s system. However, while the centralized push has clearly been effective in improving Chinese medal count, I would ask, at what cost? Aside from the sense of pride that the Chinese people might feel as their athletes ascended the podium, the benefits of this enormously expensive initiative – in both economic and human terms – are not shared by the larger public. Instead, public sports and recreational facilities are left relatively unfunded. Unfortunately, central governments tend to plan in sweeping strokes and lose sight of the individuals that must carry out their elaborate plans. For people like Zhang Shangwu, the cost has been great.

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Governments can't control food prices

Written by Victoria Buhler | Monday 11 July 2011

grainMaintaining stable food prices has become a common policy goal, especially in the developing world in which basic food goods might otherwise be inaccessible. On the surface, this seems like the only humane course; however, governments may actually have less altruistic reasons for supporting this price controls. Rather, they may be worried about their own survival rather than that of their people.

Throughout history food prices have been a reccurring grievance and cause for political agitation. With examples such the women’s march on Versailles during the French Revolution and all the way to the more recent riots in Tunisia, its no wonder political leaders try to maintain stable prices of food. Their livelihoods (and lives) may depend on it.

Despite these domestic pressures, measures aimed at reducing food price’s volatility virtually always do more harm then good. Consider a policy of a price ceiling on sugar: in response to the excess demand over supply (which a price rise would balance out), the government would either have to ration sugar or meet the demand through importation, which would only raise the world market price of sugar even more. The former is inefficient and the latter is unsustainable.

On the world stage these policies create more pricing problems than the individual fluctuations would. Consider the case of a country that produces a given food commodity and whose government wants to shield its citizens from price increases on the global market. That government might impose export controls, or limits to the quantity of that commodity that could be exported. However, this again has counter-intuitive effects: the export controls reduce the total supply on the global market, which increases the commodity’s price. Furthermore, domestic producers that can’t sell their goods for their full value either domestically or on the international market price will substitute away from production of that good, further reducing supply and thus further increasing price. Export controls simply impoverish the farmers even more.

Price controls don't pay off. The best ways to ensure long-term stability in food prices is not through short-term gimmicks like price and export controls that distort the market. Instead the government should aim to reduce trade barriers so that the maximum amount of supply can reach the international markets, from which it can be allocated efficiently.

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One small step for man, one giant leap for private markets

Written by Victoria Buhler | Thursday 07 July 2011

This Friday will mark the last ever space shuttle mission in NASA’s program. The program has lasted nearly half a century and seen the launch of over 135 missions (including this last one by the Atlantis). For those who can remember being glued to the television as the Discovery, Endeavour, challenger and Columbia blasted out the Kennedy Space Center, this may be a bittersweet moment. However, the tearful can take comfort in the thought that they are waving goodbye to another landmark: the government’s fifty-year monopoly in the space industry.

For many, space exploration has represented the pinnacle of what a government can accomplish and has even served as a justification for state initiative. While the early days of the space race did have an element of competition – between the two rival states of the United states and the Soviet Union – at present the entire industry serves as a testament to the lack of innovation that accompanies the absence of that competition. The shuttles themselves, once a symbol of American innovation and creativity, were meant to revolutionize human space travel. However, each expedition costs well over a billion dollars to execute, making the dream of frequent launches simply too expensive to ever realize on the taxpayer dollar.

As the shuttles are shipped to museums, several men have been instrumental in the push to privatize the space race. Richard Branson, the famous English business magnate, has launched Virgin Galactic, which aims to offer the ‘space tourist’ experience – for a paltry $200,000, you can be shot into space on one of the newly crafted SpaceShipTwo and experience the feeling of weightlessness for a full four to six minutes. While the crafts currently only have the capacity for suborbital missions, Branson plans to eventually offer orbital flights. Another company known as SpaceX, founded by PayPal creator Elon Musk, focuses less on human cargo and more on actual cargo, specifically transporting materials such as parts and food supplies to the International Space Station. SpaceX was the first company to receive a license from the FAA – which oversees airspace over the US – for its capsule to reenter from space. This liberalization of regulation was instrumental in allowing SpaceX to test its initial technology and will hopefully open the door for other companies to follow suit.

The end of the space shuttle program doesn’t mean the end of NASA or the government’s involvement in space. Rather, Obama framed the retirement of the shuttles as a way to shift precious funds towards other more innovative projects such as manned trips to Mars or even to an Asteroid. However, given the efficiency of private markets compared to government monopolies, the tourists on Virgin spacecrafts may reach Mars well before the NASA astronauts do.

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Is there a social networking bubble?

Written by Victoria Buhler | Friday 24 June 2011

Capitalism has never been cuddly. But the promise of the market is that if you work hard to produce a good product, consumers will reward you. In the short term, these rewards come in the form of profits. If your products consistently deliver, you can develop a reputation for unique and distinctive excellence that garners consumer loyalty—this process is known as branding. Branding both allows you to charge a premium on your products as well as partially protecting you from competition from other firms offering similar products. In short, branding is essential for the future growth of a company.

Differences in the competitive nature of given industries create differences in the way that branding functions. Compared to an industry such as department stores in which a few giants have dominated for decades, the technology industry is characterized by creative destruction. On crack. The Internet platform allows for low start up costs and fewer other barriers to entry, so new companies are constantly popping up—and dying out. In this sort of cutthroat atmosphere, branding can be the only thing that saves an Internet company from fading into the oblivion of the world wide web.

However, while for the department store industry, branding rests on having a storied, traditional name like Harrods and Harvey Nichols, for technology companies branding means something completely different. Given the enormous amount of competitors who can all deliver roughly similar products quite cheaply, branding isn’t just about quality. It’s about Cool. Crucially, Cool is both the most important quality to have and also that which is most difficult to engineer. And cases like that of MySpace prove that it can be the most fleeting too.

Given that branding with social networking services relies so heavily on the Cool factor, it’s hard to understand the hype around Internet companies like LinkedIn and Groupon. Admittedly, these companies have proved successful thus far. LinkedIn, which provides professional networking services, saw its shares more than double in value on its first day of trading. In addition, the online deal website Groupon is attempting to raise $1 billion through an initial valuation of $20 billion. This is for a company that has yet to turn a profit.

Some companies, such as Google, manage to have created that magical balance of Cool and reliable in a brand—for now, at least. But within the highly combustible technology industry, such success is often as transient as it is rare. Remember the cool girls in high school? Still think they are so cool now? Welcome to Myspace.

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Sweden is no socialist paradise

Written by Victoria Buhler | Thursday 23 June 2011

stockholm

Sweden is held up as a socialist’s paradise, proof that big government can deliver big results. However, a new report argues that Sweden’s economic success occurred because social and cultural capital as well as its unique historical circumstances. Indeed, Sweden came out on top in spite of, rather than because of, the socialist policies.

Firstly, the foundations of Sweden’s later success were created between 1870-1936, before the ascendency of the Social Democratic party. The giants of Swedish industry, Volvo, Ikea, and Alfa Laval, all arose during this era of largely unregulated capitalism. Low taxes and pro-business attitudes reigned, and the results are manifest.

Secondly, the authors posit that Sweden’s continued success rests upon social and demographic factors outside the reach of government policy. As they put it, “The perceived advantage of Swedes over other countries rose before the rise of the welfare state”. The factors underlying Sweden’s success are the “Lutheran work ethic” and the “cohesion of a largely homogenous population with particular social values”.

To prove the second point, the authors attempt to show that Swedes living abroad have enjoyed just as much success as their counterparts that did not emigrate. One example is that the poverty rate for Swedes living in Sweden is identical to the poverty rate for Swedes living in America (6.7%, using the same threshold calculations. Furthermore, many government programs in Sweden, such as the enormous State-run healthcare apparatus, have not produced a demonstrable difference in the life expectancy of Swedes. For example, “In 1950, before the rise of the high0tax welfare state, Swedes lived 2.6 years longer than Americans. Today the difference is 2.7”. Enormously expensive socialized medicine has produced only a negligible difference in citizen’s health.

Since governments cannot force their citizens to adopt a Lutheran work ethic or create a largely homogenous population without engaging in large scale social engineering (inappropriate on one side of the scale, genocide on the other), what lessons can the struggling state learn from the Swedish model? Simply: that growth and wealth creation is best left to individual entrepreneurs, and the best action the government can take is to create a pro-business environment in which these individuals have the highest chance of success.

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Legalize gay marriage, kickstart the recovery?

Written by Victoria Buhler | Saturday 18 June 2011

The debate over same-sex marriage often rests upon the authority Leviticus. However, the Bible, while filled with heavenly wisdom, sometimes does not provide the best modern legislative guide (see Deuteronomy 12: 11-12, for instance). Esoteric debates on natural rights and Judeo-Christian morality have merit, but nothing is more successful in wooing me in one direction over another than a well-calculated spreadsheet.

A study by the Williams Institute at University of California, Los Angeles, (PDF) does just that. It analyzes the impact of legalization of gay marriage in Massachusetts, then extrapolates the data and applies its findings to California’s economy. What follows is nothing short of an economic justification for gay marriage.

The study forecast the following trajectory: an initial wave of marriages – a result the significant built up demand among pre-existing, committed same-sex couples – followed by the gradual tapering off, with the overall marriage rate showing a lasting increase.

This wedding bubble would have following economic effects: Gay couples would spend nearly $700 million on wedding services over a three-year period’ Over 2000 jobs would be created in the nuptial industry. Allowing economic activity to take place is the key to growth. Another study by the non-partisan Congressional Budget Office reported that the liberalization of marriage requirements across all 50 states would generate an additional $1 billion in revenue annually.

Furthermore, legalization would almost certainly encourage gay immigration. Given the acrimonious debate in the UK over immigration in general, let's take a minute to justify a policy that would specifically increase gay immigration.

People in same-sex unions have higher rates of college education than those in straight partnerships (40% vs. 27%), which is shown to be negatively correlated with criminality. Gay couples tend to be wealthier than their straight counterparts (average household incomes of $80,610 and $73,655, respectively). And of course, gay couple are just cooler (difficult to quantify, but impossible to deny – some would call it cultural capital).

While the debate has so far defined gay marriage as a political issue, it can be framed as a question of market freedom as well. The gender restriction on marriage ought to be abolished. The UK should liberalize its marriage market by removing the moral monopoly that currently exists. 

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HMV must adapt or die

Written by Victoria Buhler | Monday 13 June 2011

HMVWhat was the most dangerous evil to come out of Pandora’s box? Classical texts point to greed, envy, and the relentless pursuit of power. Modern tabloids would suggest lust. I am convinced that of all the evils, Nostalgia exerts the most corrosive influence on human happiness. Nostalgia, or the false romanticization of the past, breeds an aversion to change. Of course, change may not always be good, but an unwillingness to at least be open to change is always bad.

Consider HMV. The high-street retailer, which offers CDs, DVDs and other entertainment products, has faced steeply declining profits as a result of competition from internet shopping and supermarkets. A couple of days ago, HMV secured a £220 million loan from lenders that included state-backed institutions such as RBS and Lloyds banking group. The loan in itself is not bad; the company can use this opportunity to dramatically reconfigure its business model and emerge in a more competitive form. If HMV once again becomes profitable, the shareholders, the lenders, and everyone else involved in the deal benefits. The dialogue surrounding the circumstances of the loan issuance, however, was worrying.

Romaticization began with puff pieces like one in the Guardian entitled ‘Would you miss HMV?’ which included maudlin reminisces such as ‘there is nothing like owning a record’ and ‘its been really sad seeing stores close down one by one—I don’t want HMV to be next'. There are some things worth preserving, but the sort of sentimentality that portrays HMV as a British national treasure is silly at best and destructive at worst.

Consumers clearly do not value HMV that highly. HMV is not going out of business because of a sinister-investment banker-driven-plot-to-destroy-all-that-is-good-and-wholesome-in-the-world. HMV is going out of business because the majority of consumers prefer to purchase their CDs/DVDs online at lower prices (or illegally download them) rather than travel to a store and pay more. Some people might prefer the latter experience, but not enough to support the current massively expensive operating model. Either HMV will have to downsize, streamline, and reinvent in order to serve this niche consumer base, or it must exit the market entirely.

The demise of HMV as we know it does not mean the end of entertainment, but rather a transition towards new forms of entertainment distribution and consumption, as demanded by the consumers. For the true CD lover out there, you will still be able to buy CDs, just as you can still buy a gramophone. Given the limited demand for gramophones, you have to shop online or in a specialty shop rather than in a massive gramophone complex on Oxford Street, but the option is still there. So it is with CDs. If consumers demand a good or service, the market will provide it – even if it’s obscure. But if they don’t, no one should be forced to subsidize its provision for the sake of nostalgia.

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There's nothing like a good invasion

Written by Victoria Buhler | Sunday 12 June 2011

The New York Times offers a new growth strategy for countries struggling with stagnant economies: invasion. After all, if you are just willing to lower the starting point enough, you too can enjoy 11% GDP growth! Having your country razed, villages pillaged, and women raped is a small price to pay for the holy grail of economic policy. Oh, the miracle of modern economic statistical analysis.

The premise behind the article’s optimistic spin is this: ‘There is nothing here. Therefore, there must be money to be made here.‘ Unfortunately history shows that the huge fortunes tend to be generated by the wealthy elite who alone have enough capital for the initial investments and start up costs. Furthermore, in this competitive vacuum, the elite can build secure their grasp on monopolies that will continue to restrict competition and distort the markets even after the country recovers.

Nevertheless, apart from the ‘hot-money cowboys’ (what’s Arabic for Abramovich?), there is no doubt that the lack of regulation and unsatisfied demand for goods and services could provide a ripe environment for small-scale entrepreneurship. However, the anecdote about the university students enquiring when American companies would begin hiring in Iraq illustrates the difficulty in fostering that innovative spirit.

Growth is often held as the overarching goal of economic policy. After all, Growth lifts the masses out of poverty, Growth allows future Growth, and Growth may even be able to make a rock that it cannot lift. But despite the benefits of growth in the abstract, a certain overall trajectory is desirable as well. Economic aggregates can be deceptive. Something tells me the Obama administration will not leap for this strategy. It shouldn't.

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Environmental inefficiencies

Written by Victoria Buhler | Friday 10 June 2011

The environmental movement has often discredited its cause by resorting to alarmism underpinned by poorly substantiated claims. It’s a pity. Not many people nowadays deny that human behaviour has an effect on the Earth's ecosystem. But, equally, no serious environmentalist who aspires to influence policy can advocate a return to the Stone Age. The environmental movement can be, and should be, a pro-market movement in which you, as a consumer, determine the policy.

Pollution and climate change in general affect consumers in two ways: firstly, if firms must change their production patterns to become more environmentally friendly then you, as a consumer of goods, will face higher prices. Secondly, if firms fail to change their production patterns, you as a consumer of clean air will receive a lower quality product. Clean air affects your quality of life now, and the consumption of limited non-renewable resources affects your quality of life later. If we put the histrionics and baby seals aside, there is no reason why a little old fashioned economic logic can’t make everyone, as global consumers, better off.

The problem right now is that there is no existing market mechanism to ‘price’ environmental degradation. Yes, different people value it differently, but that shouldn’t be a barrier to exchange. Other markets handle infinite different valuations to determine a price at the intersection of the supply and demand. Why, therefore, has as a market for this not emerged?

An externality is a benefit or cost to an external party that results from the action of unrelated party. Pollution is an externality. According to Coase’s theorem, if the rational parties with properly rights that incorporate externalities are able to engage in costless bargaining, an efficient allocation should emerge regardless these externalities. In short, markets should be able to account for externalities.

However, the problem with the market place for clean air is that property rights of the parties involved are ill defined. For example: My roommate believes that she has the right, as a co-paying member of our flat, to listen to Swedish House Mafia until 4AM. I know, however, that she does not. Our negotiation process will inevitably degenerate into whining, screaming, and maybe armed assault with a hairbrush, because our property rights at the beginning is not clearly defined. If we both agreed that house music was an inalienable right irrespective of time and place, then I might be willing to bribe her by doing her dishwashing or with chocolate. In short, we could establish a mutually agreed upon ‘price’ by which to trade a unit of house music.

The tragedy of the global commons therefore stems from tragically poorly defined property rights. Our current allocation of consumer goods –in short, our current lifestyle, is inefficient because market prices do not reflect the true costs and benefits of the production and consumption of goods. Do factories have a right to pollute? Do children have a right to clean air? What balance should be struck between the two? These seem like nebulous questions, but a clear answer to each is necessary for the success of any market-based strategy to climate change.

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In microfinance, small is beautiful

Written by Victoria Buhler | Thursday 09 June 2011

Ever since monks had to take vows of chastity, obedience, and poverty, it has been assumed that in order to be saintly you have to be poor. This misconception has prevented many would-be-do-gooders such as charities and NGOs from harnessing the power of the profit incentive in their quest to change the world. However, the supposed sin of capitalism can deliver development results that are nothing short of miraculous. One particularly successful development trend has been microfinance, the issuance of small loans to would be entrepreneurs unable to secure credit from a conventional banks. A poverty solution that rests on hard work, innovation, and expanded market access? Perhaps microcapitalism would be a better term.

The original version of microfinance, as pioneered by Nobel Peace Prize winner Mohammad Yunus and his Grameen Bank, operated along a non-profit model. A recent reincarnation, however, still seeks to expand the access of the poor to credit – all while turning a profit. And while the non-profit groups are forced to rely on scanty donations from elderly hippy couples, for profit microfinance organizations can attract big name investors like George Soros and Goldman Sachs—big names means big contributions, and more capital means more loans can be given out to more people.

Recently, the microfinance industry, and in particular its for profit variety, has ballooned. Even conventional banks have launched microfinance branches, which by all accounts have become some of their highest performing areas. However, the industry’s growth has not been welcomed in all quarters. Local and national governments in India and Bangladesh have sought to regulate and even take over the microfinance organizations operating within their borders. This invasive regulation is defended as a response to ‘predatory lending’ and suspected ‘corrupt practices’. The Reserve Bank of India has decreed that microlenders cannot receive priority sector credit unless they agree to accept a hard cap of 26% on their interest rates. Furthermore, in the Indian state of Andhra Pradesh, local officials have actually instructed borrowers not to pay back their loans. Government manhandling such as this sends investors running – stocks in the microfinance group SKS have lost nearly 75% of their value since last year’s peak. The entire industry is now at risk.

Yes, microfinance banks may be lending to the poor at rates that a conscientious objector in the developed world might not agree to. But, in many communities, microfinance remains the only viable means for the poor to secure credit. The answer is not to regulate microfinance by imposing crude caps on their interest rates, but rather to allow microfinance to blossom into a profitable industry. As profits encourage more firms to enter the market, companies will be forced to compete for consumers, forcing down the interest rates. The free market therefore can achieve the very result that regulators seek, all while creating an environment in which both the consumers and the firms benefit.

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