Here's an interview with Thomas Friedman in Yale Global Online (18 April 2005). Some quotes, with the issues I see in them italicised:
Lean thinking:
Wal-Mart doesn't make anything. But what they do is draw products from all over the world and get them into stores at incredibly low prices. How do they do that? Through a global supply chain that has been designed down to the last atom of efficiency. So as you take an item off the shelf in New Haven, Connecticut, another of that item will immediately be made of that item in Xianjin, China. So there's perfect knowledge and transparency throughout that supply chain.
International trade vs local social costs:
The consumer in me loves Wal-Mart... And not just me... Some lower-income people are stretching their dollars further because of Wal-Mart...The shareholder in me... loves Wal-Mart... The citizen in me... hates Wal-Mart, because they only cover some 40 percent of their employees with health care... [For the rest,] we tax-payers pay their health care. And the neighbor in me... is very disturbed about Wal-Mart. Disturbed about stories about how they've discriminated against women, disturbed about stories that they've locked employees into their stores overnight, disturbed about how they pay some of their employees. So... I've got multiple identity disorder, because the shareholder and the consumer in me feels one thing, and the citizen and the neighbor in me feel something quite different.
New Growth Theory issues:
What is the mix of assets you need to thrive in a flat world? Money, jobs, and opportunity in the flat world will go to the countries with the best infrastructure, the best education system that produces the most educated work force, the most investor-friendly laws, and the best environment. You put those four things together: quality of environment that attracts knowledgeable people, investment laws that encourage entrepreneurship, education, and infrastructure. So that's really where, in a flat world, the money is going to go.
And I don't really believe much in foreign aid because I think, at the end of the day, that's not how countries grow and get rich. But to the extent that you are going to give foreign aid, it should be to inspire, encourage, and help develop one of those four pillars for whatever developing country you're dealing with. But I do believe in trade, not aid. I think that axiom still applies, even more so in a flat world.
Security:
The flat world is a friend of Infosys and of Al-Qaeda. It's a friend of IBM and of Islamic jihad. Because these networks go both ways. And one thing we know about the bad guys: They're early adopters...
Trade, nationalism and peace:
...what I call the "Dell Theory" – you know, Dell Computers. The Dell Theory says that no two countries that are part of the same global supply chain will ever fight a war as long as they're each still part of that supply chain... here's what I predict: If you do go to war and you're part of one these supply-chains, whatever price you think you're going to pay, you're going to pay ten times more. Once you lose your spot in the supply chain because you've gone to war, the supply chain doesn't come back real soon. They're not going to. Fool me once, shame on you; fool me twice, shame on me. That's why you really risk a lot. And that's why these supply chains now really mean a lot. They're the new restraints.
Anti-globalization:
The anti-globalization movement ... is basically dead today – because China and India have embraced this process and this project... The anti-globalization movement... [are] all still talking about the IMF and the World Bank and conditionality – as if globalization is all about what the IMF and World Bank impose and force on the developing world. Well when the world is flat, there's a lot more globalization that's about pull. This is people in the developing world – in China, Russia, India, Brazil – wanting to pull down these opportunities.
Intellectual property rights:
Look at what happened in [India] with intellectual property law... there's no question that we did want India to have intellectual property protection to protect our products... But what it turned out was that a lot of Indians wanted it as well because they become innovators themselves. They are now plug-and-playing in this world and they want the intellectual property protections for their innovations.
Failure of Western technical education:
There is a crisis. We're not producing in this country, in America, enough young people going into science and technology and engineering – the fields that are going to be essential for entrepreneurship and innovation in the 21st Century. So we're at a crisis – it's a quiet crisis, as Shirley Ann Jackson from the Rensselaer Polytechnical Institute says. If we don't do something about it, then in 10 to 15 years from now this quiet crisis will be a very big crisis. And that's why my friend Paul Romer at Stanford says – and I totally agree with him – is a crisis is a terrible thing to waste. And right now we're wasting this crisis.
Saturday, July 28, 2007
New Growth Theory: should we pay handsomely to make ideas free?
When Tony Blair became Prime Minister, his slogan was "education, education, education". We thought he was merely reflecting our discontent with schools, but now I'm not so sure.
In 1994, Gordon Brown was quoting a new economic theory by - google him up - PAUL ROMER. Here is a 2001 interview in Reason Online with Romer. It turns out this may be to New Labour what Sir Keith Joseph’s espousal of monetarism was to Margaret Thatcher’s premiership. “New growth theory” is by Paul Romer, and bears on:
A core debate in this theory is the ownership of knowledge. Romer says that price is both an incentive to the producer, and a means of deciding who gets the product (or what product they choose). An example he gives in his interview is the life-saving treatment for children with diarrhea in poor countries:
...the efficient thing for society is to offer really big rewards for some scientist who discovers an oral rehydration therapy. But then as soon as we discover it, we give the idea away for free to everybody throughout the world and explain "Just use this little mixture of basically sugar and salt, put it in water, and feed that to a kid who's got diarrhea because if you give them pure water you'll kill them."
So with ideas, you have this tension: You want high prices to motivate discovery, but you want low prices to achieve efficient widespread use. You can't with a single price achieve both, so if you push things into the market, you try to compromise between those two, and it's often an unhappy compromise.
Ideas can be duplicated easily and cheaply, but they often cost a lot of money to come up with. For example, pharmaceutical firms do hugely expensive R&D - could they recoup the cost of successful solutions, and all the unsuccessful ones, via a prize competition? What happens if they go bust a yard before the finishing line?
What about areas where the humanitarian argument may be weaker? What if some Far Eastern car factory comes up with a tweak on, say, the Wankel engine design and goes into very successful (and low-labour-cost) production, paying nothing to the people who came up with 99% of the ideas? Sir Tim Berners-Lee (may we never forget his name) gave away the Internet, but should all hard-won knowledge be free?
And what exactly are the implications of a "knowledge economy"? Does State-organised education, with its top-down management, encourage the development of the creativity we need? Do we need 50% of our young people to go to college? Should they choose their subjects, or be told what to learn? Should they be given incentives to study in areas that are thought to be important? How far should we be prepared to fund research that has no immediately foreseeable practical application?
Romer is certainly right in saying that a smart workforce is an asset (and a smart management - we could do with some de-Dilbertising), and that there's lots of potential in continuous, incremental improvement. "Lean thinking" may buy us time in the destabilizing conditions of a globalized market - if we use our brains to improve what's in front of us at work every day, we may not go bust quite as fast as the doomsters fear.
But as the economist himself admits, it's a can of worms.
In 1994, Gordon Brown was quoting a new economic theory by - google him up - PAUL ROMER. Here is a 2001 interview in Reason Online with Romer. It turns out this may be to New Labour what Sir Keith Joseph’s espousal of monetarism was to Margaret Thatcher’s premiership. “New growth theory” is by Paul Romer, and bears on:
- education (a key slogan in Tony Blair's election campaign)
- skills training for workforces (a UK government initiative currently advertised on TV)
- intellectual property rights (relevant to design and patent theft by foreign manufacturers)
- free trade/globalisation
A core debate in this theory is the ownership of knowledge. Romer says that price is both an incentive to the producer, and a means of deciding who gets the product (or what product they choose). An example he gives in his interview is the life-saving treatment for children with diarrhea in poor countries:
...the efficient thing for society is to offer really big rewards for some scientist who discovers an oral rehydration therapy. But then as soon as we discover it, we give the idea away for free to everybody throughout the world and explain "Just use this little mixture of basically sugar and salt, put it in water, and feed that to a kid who's got diarrhea because if you give them pure water you'll kill them."
So with ideas, you have this tension: You want high prices to motivate discovery, but you want low prices to achieve efficient widespread use. You can't with a single price achieve both, so if you push things into the market, you try to compromise between those two, and it's often an unhappy compromise.
Ideas can be duplicated easily and cheaply, but they often cost a lot of money to come up with. For example, pharmaceutical firms do hugely expensive R&D - could they recoup the cost of successful solutions, and all the unsuccessful ones, via a prize competition? What happens if they go bust a yard before the finishing line?
What about areas where the humanitarian argument may be weaker? What if some Far Eastern car factory comes up with a tweak on, say, the Wankel engine design and goes into very successful (and low-labour-cost) production, paying nothing to the people who came up with 99% of the ideas? Sir Tim Berners-Lee (may we never forget his name) gave away the Internet, but should all hard-won knowledge be free?
And what exactly are the implications of a "knowledge economy"? Does State-organised education, with its top-down management, encourage the development of the creativity we need? Do we need 50% of our young people to go to college? Should they choose their subjects, or be told what to learn? Should they be given incentives to study in areas that are thought to be important? How far should we be prepared to fund research that has no immediately foreseeable practical application?
Romer is certainly right in saying that a smart workforce is an asset (and a smart management - we could do with some de-Dilbertising), and that there's lots of potential in continuous, incremental improvement. "Lean thinking" may buy us time in the destabilizing conditions of a globalized market - if we use our brains to improve what's in front of us at work every day, we may not go bust quite as fast as the doomsters fear.
But as the economist himself admits, it's a can of worms.
Friday, July 27, 2007
A Bluffer's Guide, Part Zero
The new British Prime Minister, Gordon Brown, has a reputation for being fearsomely intellectual. In a speech back in 1994 he referred to "post neo-classical endogenous growth theory", a shut-'em-up phrase if ever there was one.
Except with Members of Parliament, who are no strangers to bull, many of them having buffed up their chatter muscles at Oxford and Cambridge. Michael Heseltine (Pembroke College, Oxford), then President of the Board of Trade for the Conservative government, suspected Brown (Edinburgh) had gotten this showy material from his economic adviser, Ed Balls, and drawled, "It's not Brown, it's balls."
For in most cases, you can say it more simply. Or if you prefer, you can go ahead and hit people over the head with it, but be prepared to clarify if challenged.
So I've looked for relatively simple explanations of EGT (shall we who are now in the know agree to use this outsider-excluding acronym?). Here's what I've got so far:
Endogenous growth theory - from Investopedia
And here's something else worth reading, by Gladys We. It is a few pages long, but it explains it well enough so I can understand it - I think.
Politically, it seems EGT can be used as an argument against free trade and intellectual property rights. For the latter, see page 5, point 5; okay to steal someone's ideas, refine them and then copyright them. I'm sure there's Far Eastern firms that'd be fans of this policy; something to advocate amiably over the pre-prandial sherry in the Senior Common Room - until you put it into practice by plagiarizing the Master's work.
UPDATE (Saturday morning):
It's now called "new growth theory". EGT is so last evening.
Except with Members of Parliament, who are no strangers to bull, many of them having buffed up their chatter muscles at Oxford and Cambridge. Michael Heseltine (Pembroke College, Oxford), then President of the Board of Trade for the Conservative government, suspected Brown (Edinburgh) had gotten this showy material from his economic adviser, Ed Balls, and drawled, "It's not Brown, it's balls."
For in most cases, you can say it more simply. Or if you prefer, you can go ahead and hit people over the head with it, but be prepared to clarify if challenged.
So I've looked for relatively simple explanations of EGT (shall we who are now in the know agree to use this outsider-excluding acronym?). Here's what I've got so far:
Endogenous growth theory - from Investopedia
And here's something else worth reading, by Gladys We. It is a few pages long, but it explains it well enough so I can understand it - I think.
Politically, it seems EGT can be used as an argument against free trade and intellectual property rights. For the latter, see page 5, point 5; okay to steal someone's ideas, refine them and then copyright them. I'm sure there's Far Eastern firms that'd be fans of this policy; something to advocate amiably over the pre-prandial sherry in the Senior Common Room - until you put it into practice by plagiarizing the Master's work.
UPDATE (Saturday morning):
It's now called "new growth theory". EGT is so last evening.
October 1987 revisited
I'm trying to work out whether making an historical analogy with 20 years ago is valid.
Let's have a look at what has happened to prices. Cliff D'Arcy in The Motley Fool (22 May 2007) does a very informative comparison between houses and the FTSE 100. He reminds us that although the FTSE-100 dropped dramatically on "Black Monday" (19 October 1987), it ended about 2% higher over the year as a whole. If we take his figures for 1987 to 2006, house prices increased 287%, and the FTSE 263%. This would suggest that house prices and stock prices have increased about equally (though houses cost money to run, whereas shares pay dividends).
Are British people over-borrowed? This Bank of England research document from September 2004 says not, in relation to house prices. Yes, debt-to-income has gone up, but interest rates are now low. And despite its name, the latest survey from UK site HousePriceCrash indicates a general belief that house prices will continue to rise in the months ahead. (But recent first-time buyers will be more vulnerable, having little equity and probably a high income multiple for their loan.)
I find the monetarist arguments intuitively persuasive, but I'm puzzled by the disparity between prices and monetary inflation. Using the UK's M4 stats, over the 78 quarters from Dec 1987 to March 2007, the average annualized increase in the money supply is about 10.48%. Compounding that figure, we get about 7 times more borrowed money in the system today than in 1987. Yet houses and shares are only 3-4 times higher.
What does seem clear is that we have borrowed more in relation to income, and this makes it even more important not to lose your job, or be hit by high interest rates. It's worrying when you have to depend on things carrying on as they are, indefinitely.
Let's have a look at what has happened to prices. Cliff D'Arcy in The Motley Fool (22 May 2007) does a very informative comparison between houses and the FTSE 100. He reminds us that although the FTSE-100 dropped dramatically on "Black Monday" (19 October 1987), it ended about 2% higher over the year as a whole. If we take his figures for 1987 to 2006, house prices increased 287%, and the FTSE 263%. This would suggest that house prices and stock prices have increased about equally (though houses cost money to run, whereas shares pay dividends).
Are British people over-borrowed? This Bank of England research document from September 2004 says not, in relation to house prices. Yes, debt-to-income has gone up, but interest rates are now low. And despite its name, the latest survey from UK site HousePriceCrash indicates a general belief that house prices will continue to rise in the months ahead. (But recent first-time buyers will be more vulnerable, having little equity and probably a high income multiple for their loan.)
I find the monetarist arguments intuitively persuasive, but I'm puzzled by the disparity between prices and monetary inflation. Using the UK's M4 stats, over the 78 quarters from Dec 1987 to March 2007, the average annualized increase in the money supply is about 10.48%. Compounding that figure, we get about 7 times more borrowed money in the system today than in 1987. Yet houses and shares are only 3-4 times higher.
What does seem clear is that we have borrowed more in relation to income, and this makes it even more important not to lose your job, or be hit by high interest rates. It's worrying when you have to depend on things carrying on as they are, indefinitely.
2007 = 1987?
Greg Silberman in Safe Haven yesterday uses the chartist approach to suggest an analogy with the lead-up to the 1987 crash.
I don't know. Over the late '86/early '87 period I watched my little investment soar and began to wonder how everybody could get rich at the same time. I heard reports that people were borrowing against their houses to trade, and schoolboys were making money on the market. I don't read quite that degree of crazy optimism and greed today.
Maybe the difference is reflected in the degree of monetary inflation. In the UK, the 3 years leading up to October 1987 showed an average annualized increase in M4 of 18.59%, compared with an average 12.07% annualized over the 12 quarters to March 2007. And over here at least, people are much more leery of investments and pensions than they were then.
But there's loads more debt now. It could be that a drop happens, not because of a change in investor confidence, but on account of running short of spending cash.
I don't know. Over the late '86/early '87 period I watched my little investment soar and began to wonder how everybody could get rich at the same time. I heard reports that people were borrowing against their houses to trade, and schoolboys were making money on the market. I don't read quite that degree of crazy optimism and greed today.
Maybe the difference is reflected in the degree of monetary inflation. In the UK, the 3 years leading up to October 1987 showed an average annualized increase in M4 of 18.59%, compared with an average 12.07% annualized over the 12 quarters to March 2007. And over here at least, people are much more leery of investments and pensions than they were then.
But there's loads more debt now. It could be that a drop happens, not because of a change in investor confidence, but on account of running short of spending cash.
Cycles and charts
For the analytical, here's an essay on Kress Cycles in Safe Haven.
This, together with Kondratieff cycles and other patterns used by market chart-interpreters, has one flaw to my not-quite-so-mathematical mind: predicting human behaviour involves feedback loops. If I secretly write down what I think you're going to do tomorrow, I could be right every time; but if I reveal my thoughts to you, that changes the situation. It's a sort of Heisenberg uncertainty principle: to observe is to be involved, and therefore part of the nexus of causes.
Having said that, human behaviour does have patterns, and I believe some have theorised that the growth of our brains is in response to the competition to predict the other person's behaviour better than he can predict yours.
This, together with Kondratieff cycles and other patterns used by market chart-interpreters, has one flaw to my not-quite-so-mathematical mind: predicting human behaviour involves feedback loops. If I secretly write down what I think you're going to do tomorrow, I could be right every time; but if I reveal my thoughts to you, that changes the situation. It's a sort of Heisenberg uncertainty principle: to observe is to be involved, and therefore part of the nexus of causes.
Having said that, human behaviour does have patterns, and I believe some have theorised that the growth of our brains is in response to the competition to predict the other person's behaviour better than he can predict yours.
Gold - or cash?
Brady Willett in Safe Haven (yesterday) warns us off some "bright ideas" for preserving wealth in a market drop. He notes that gold is a hedge when everyone wants out of cash, and that's been quite some time.
I guess his position is close to that of Marc Faber, who said recently that all asset classes are inflated and on the whole, he'd prefer to stand on the platform rather than get on any of the waiting trains.
I guess his position is close to that of Marc Faber, who said recently that all asset classes are inflated and on the whole, he'd prefer to stand on the platform rather than get on any of the waiting trains.
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