To employ or not to employ; that is the question!

Not being an economist I could be completely off the mark ... but I don't think so.

I think that the time is coming when economists as well as politicians are going to have to come to terms with the unfortunate specter of high and permanent unemployment of segments of their populations. Unfortunately it also seems that high unemployment in the midst of wealth is a sure way to a rise in crime and that isn't something that anyone wants; other than the criminals that is and even then, they don't really want too much competition and not enough prey.

It seems to me that as technology has improved and globalisation has taken place fewer and fewer people are required to make, manage and run what is required for each person in the world to live but as long as consumption keeps on going up it keeps on creating more and more jobs and everyone is happy; sort of.

There are two issues which I think are going to break this cycle, the first is consumption and the second is our "potential skills ability" for lack of a better phrase.
Consumption
I think that is a limit to consumption, one can only eat so much, be entertained so much, learn so much, spend so much. Consumption is not an ever increasing appetite that can be satiated, there is a point where enough is enough even if more is available. The major way that consumption increases is through people that weren't satiated, consuming more or, failing that, there are simply more people consuming. As everyone is finding out, resources to sustain this consumption are not unlimited and whether one likes it or not consumption is going to plateau, either because people simply can't or don't want to consume anymore than they already do or there simply aren't enough resources to make what people would consume if it were available.
Skills potential
Each and every person in this world has the potential to perform many different jobs but, obviously, can only do one thing at a time. Some people may aspire to being a scientist but are just plain incapable of becoming one even given the opportunity while scientists mostly don't aspire to being road crew even though it should be well within their potential to be one. What I am driving at is that there is an asymmetry, some people have the potential to perform many jobs while others have fewer potential jobs from which to choose; all other things being equal. This is important because, before the industrial revolution, there was relatively little mechanisation and most jobs required a large amount of raw physical labour - something just about everyone was capable of. With the introduction of mechanisation some of the jobs requiring the raw manual labour disappeared and those that were previously employed in them had to 'skill up' to take advantage of the jobs that were available to those with higher skills. This has more or less worked, at least in the first world, but at some time, I'm not sure if it has happened or is happening or is about to happen, we are going to go past a turning point. This turning point is the point at which there are going to be jobs available but the majority of people will not have the potential to perform them, all other things being equal of course.

So what to do?
Going back a bit in history, during the age of the british empire the first child would inherit the estate of the parents, the second would go to the army and the third would enter the church. Inequitable as these practices were they did do an interesting thing; The second and third children and particularly the third would be employed in a industry in which there is no visible output. Yes, they were occupied full-time in their career and yes, they received a salary and yes, they believed and sometimes actually were doing some good but at the end of the day; what did they actually produce - an ephemeral product. So, in some ways entering the church acted as a sponge, a labour sponge as it were, and occupied and employed people and we need something similar, something which will have some benefit to society but it doesn't necessarily produce anything or if it does it may not be anything that people would normally willingly pay for.

Aaargh! Sometimes things are just so frustrating

I read today about a $1.5 million "investment" from AECF to Monitise to "develop m-banking services" in africa. AECF which is backed by the Rockefeller and Bill & Melinda Gates Foundations is supposedly to be helping africa to develop, which it obviously desperately needs, but I fail to see how this kind of "investment" really helps africa.

If this investment was really to help africa it should be "invested" in african companies that will develop real skills and IP that would stay in africa and be of long term benefit to africa. If it is not going to do this it just ends up being the first world gaining an aura of respectability by appearing to "invest in the development of africa". I can just hear the nay-sayers saying that an "african" company couldn't possibly develop this kind of product to which I say bullshit; there are probably at least 5 small companies in south africa alone which can and have developed mobile banking platforms and this is without even looking at zimbabwean and kenyan companies which could do just as good a job.

If you don't believe me, just ask yourself what IP this investment develops that will remain in africa? What are the software development skills that are developed that remain in africa and loading an OS and installing an application doesn't count as real skills development. My prediction is that on both counts the answer will be NONE and if this was really about the development of africa the answers should not be NONE.

Even worse, this not only takes an opportunity away from an african company but actively keeps african companies from developing by removing potential customers from what is already a small market place. The "investment" effectively subsidises first world software development and helps to ensure that third world software development can't and won't compete.

Now that the rant is over, I have to say that I really hope that AECF is doing this unwittingly and that their intentions really are what they consider "best" for africa but what they consider "best" doesn't make much sense to me.

Professional Fortune Tellers

It seems to me that there are a significant number of professions that ought to have the tag "Professional Fortune Teller" appended to their qualifications. Here's how it works:
Everyone knows that it is not possible to predict the future however people and businesses need to know the future in order to position themselves advantageously so they hire, to avoid responsibility, these professional fortune tellers to give their opinions on the future and these opinions become quasi-reality. At some point in the future the present catches up and the predictions made are either mostly right or mostly wrong; if they were right, the fortune teller gets tick next to his/her name and the employer feels that the money invested in the prediction was justified. If however the fortune teller was wrong he/she gets a cross next to their name and the money invested is written off to experience. Either way, the next day the process starts again but the future is like a quantum state; if you observe it - it changes so who's to say that one didn't actually observe it but by doing so it changed.

Professional Fortune Tellers : Economists, Investment Advisors, Project Managers, Financial Forecasters, Traders, Budgets, Retirement Planners, Risk Assessors
Employers of Professional Fortune Tellers: You, me and everyone else.

So what is my point? There is nothing wrong with hiring Professional Fortune Tellers after all; an educated guess is better than an arbitrary guess but one should never lose sight of the fact that at the end of the day it is still just a guess.

Open Source Economics

I was talking to jason a few weeks ago, actually it must be more like 6 or 8 weeks ago, about open source software and he was questioning how it actually works from a business point of view and I didn't have a very coherent answer to give to him. I've never really thought much about it and I am sure that someone somewhere has probably delved into it in great detail. My answer may still not be that coherent but for what it is worth; here it is.

Restating the question so I can keep in mind what I am trying to answer; the question is "How can I make money if I open source my creative work, thus enabling my potential or real competitors to compete with me on a level playing field?"

I think that this should be split up for the sake of discussion into several statements;

1. "The objective of the person making the statement is to make money; not indulge in an altruistic venture."
Although some people are altruistic in parts of or in some rare cases all of their lives; most people are not and I would find it pretty hard to believe that all open source developers are entirely altruistic. Since open source software doesn't seem to be going away something must be driving it and I think that to answer this, one should consider the net benefit of open source to the creators of the creative works rather than the benefit of the created work in isolation. If one were to give away a small value, being the time invested in creating the creative work, but in return receive a much larger value being the time invested by other people in their creative works which one uses; although no money has changed hands, value certainly has and one would be a net beneficiary.


2. "Releasing a creative work under an open source license really is "giving it away" for other people to use pretty much as they please within the limits of the open source license."
Software, like knowledge, has an unusual property in that it may be shared as in "given away" with both the giver and receiver maintaining full use of or access to it. I think one of the basic problems with understanding open source is the very human resistance to "giving it all away" which is in essence what one is doing as the author of an application or work released under an open source license. Again, one really needs to look at net benefit rather than the isolated return from the creative work in question because although you are indeed "giving it all away" the "all" only describes what is being given away and not what is being received. As long as what is received is of more value than that given away, there is a positive reason to participate.

3. "Competitors really would have access to your creative work and therefore be able to compete against you on a level playing field."
True, competitors really would have access to your creative work but that does not necessarily mean that they are competing against you on a level playing field. There are many aspects that together contribute to the succcess of an enterprise and only some of them relate to the actual product being sold. Alternatively, if what one is giving away isn't in the same playing field that one competes in, the whole question goes away altogether because it may not be possible for a competitor to really use it against you.

I would like to divide businesses up into two categories for the sake of this discussion; those that develop and sell software (open or closed source) and those that don't actually sell software but use software in the production of something else that people pay for be it a services or physical goods. I think that the first category of software creators is in for a rough ride and may even be doomed mostly because the second category of businesses are constantly looking for ways to decrease costs in the production of their services or physical goods. If one way for them to do this is to create applications that are open sourced and in return they gain access to a much higher value by being able to use other peoples open sourced applications; they will do so. Moreover, since they are not trying to derive income from the sale of the actual software produced as it is a almost a by-product of whatever they are actually producing, it is going to be very difficult for the first category of software developers to match. In other words, it is in the interests of those businesses whose products are not software to support open source initiatives since for relatively small amount invested, they can derive substantially more value than invested. Of course there are always going to be free-loaders, those who use but do not contribute anything in return but aside from the unfairness of this, as long as there is a net benefit to those that do contribute; they will continue to do so.

For those that produce software products that they sell and in turn pay for the software products used in the production of their own products there is no moral dilema between closed and open source but they had better hope that their product isn't or doesn't become someone else's by-product. By "someone else" I am not meaning the monolithic business typically thought about but could be universities, businesses or just groups of interested individuals whose interest in the product isn't monetary.

For those that produce services or physical goods, it is in their interests to support open source software since by doing so they are able to derive disproportionate value for the value invested and if they don't have a moral backbone, this ratio tends towards infinity since they don't pay for anything but simply decrease costs.

So, the simple answer is "You can't" but that is not to say that open source does not have a valuable part to play in business in the future.

I feel sure that I will revise this at some later stage but these are my thoughts to date.

Politics, Religion and Wealth

"Also note this: secularism thrives in an environment that is economically strong, where good education is the norm. Faith thrives on economic uncertainty, and grows best in ignorance. Guess which one of those conditions is easiest to generate and maintain? Cultivating a healthy society that can grow and sustain itself, with a well-informed democratic populace, is hard work. Producing an economic rathole inhabited by frightened sheep is easy — elect a few incompetent leaders, throw away resources on futile, bloody projects, and unchain rapacious business interests to exploit short-term personal gains at the cost of sustainability, and you've got a recipe for a fast slide back into the dark ages."

The quote is from Pharyngula but could so easily have been describing our current government and situation.

The article also refers to the following very interesting interview by Bill Moyers

Electricity Woes

So ESKOM expects us, the population, to decrease out usage of electricity by 10% in order to stave off the so-called load shedding. Without putting too fine a point on it, this is another example of the type incompetent management that has landed us in this mess in the first place.

Firstly, whether we do or don't reduce out power consumption by 10% we are going to be subjected to load shedding - spot the incentive to save electricity.
Secondly, those people who have actually cut down on electricity usage by replacing lightbulbs, installing solar geyser, switching to gas for cooking etc are now in a pickle. They ALSO have to reduce their consumption by 10% but now, having done the easy ones, in order to save another 10% it gets more and more difficult and more and more expensive. Isn't it ironic that the rules as communicated at the moment are going to penalise both the historically responsible and the historically irresponsible.
Thirdly, increasing the price of electricity, which I happen to fully agree with, has to be done across the board for both domestic and agricultural and industrial users. If it isn't, then all that happens is that those paying the higher price effectively subsidise those paying the lower prices.
Fourthly, Domestic use account for a relatively small proportion of the total electricity use so cutting it by 10% is actually only cutting it by 10% of the 30 or 40% of the total that it constitutes.
Fifthly, reducing electricity consumption can only be done two ways. Either one changes one's lifestyle or one pays for energy efficient appliances. The thought of changing one's lifestyle e.g. cold showers because ESKOM is incompetent is probably not going to happen in a hurry, people don't change lifestyle easily even if there are very good reasons for doing so. That leaves us at the pay option. Assuming that I am a good citizen and I go and install a solar geyser, a gas oven and replace all lightbulbs with energy saving ones that will set each household back about R20,000.00. Multiple that by the number of households which, I'm guessing here, would be about 1,000, 000 that use the majority of domestic consumption and one gets to a staggering total of 20 BILLION rand that the tax paying citizens have to cough up.

My solution would be to seriously look at shutting down all aluminium smelters AND increase electricity prices across the board for the following reasons:
1. I have read somewhere that they on their own consume 10% of total electicity consumption, I am open to correction on this.
2. Aluminium smelter don't employ a lot of people so the inevitable job losses are more easily manageable and well defined.
3. Increasing electricity prices will encourage people over time to move to energy efficient technology but because it is over time it will be more of a replace what is broken with energy efficient appliances rather than throw away working appliances and replace.
4. Aluminium smelters simply export our very cheap electricity. The bauxite arrives in ships, uses our electricity to refine it and then leaves as aluminium. Why, when we don't have enough electricity to go around are we exporting our electricity?

Of course, this will never happen because:
1. It will mean tough decisions have to be made by ESKOM and tough decisions only get made by competent management.
2. There are long term contracts in place already which have to be negotiated out of but if you weigh up the 20 Billion that tax payers are going to pay to reduce electricity and the penalties that getting out of the contracts are going to incur. 20 Billion takes a lot of topping.
3. A follow on from 2, someone has to take responsibility for getting out of those contracts and responsiblity isn't ESKOMs strong suite. We are already getting the message from ESKOM that the reason that we're in this pickle is because we, the public, use too much electricity not that ESKOM were incompetent in their handling of the entire crisis.
4. Contracts with the smelters are going to have to be renegotiated anyway to take into account the general price rises in electricity. Oh, I forgot, they aren't going to be renegotiated - we the public are going to end up subsidising industry.
4. Reneging on the contracts or force buying the smelters is going to seriously piss off some major heavy weight industrial conglomerates. Again, ESKOM doesn't have the gutzpa to do this.
5. My very rough and ready calculations could be way off which would let ESKOM off the hook and before anyone picks up on this as a sign of my own incompetence. Energy is not my business as it is ESKOMS.

Ok, got that off my chest. Now I can go back to more pleasant commentary.

Ron Paul on the Mighty Dollar

Very interesting read on Dollar Hegemony according to Ron Paul especially where he alludes to Iraq having actually sold oil for Euros instead of Dollars prior to the invasion of 2003.

In Debt we Trust

I happened to get invited (along with the trusty wife) to a screening of Danny Schechters latest documentary which I found extremely interesting and illuminating particularly since the line of work that I am in was cast as the evil empire - chewing up innocent, ill-informed americans and spitting them out on the trash heap of life.

The basic premise of the movie is that the credit card industry gives people, in this case americans, access to too much credit and once they have availed themselves of this seemingly free resource - they find out that it isn't really free and it drags them down in a spiral of interest induced debt. The director spends most of the movie concentrating on the evil empires of Mastercard and VISA and how they actively plot the impoverishment of the masses for the enrichment of the few which, although difficult to prove, is even more difficult to disprove.

While I appreciate that one needs to lay it on thick to really punch the point home I do feel that Danny should have attacked the credit industry as a whole rather than just the credit card industry. Nonetheless, he makes a very good point which is that while credit in some instances is a necessary facility, in most it is merely an additional cost on the purchase of the goods in question and that without management it can lead to people entering the debt spiral.

One really interestig tidbit that emerged from the movie was that research conducted by the credit card companies in the 60's and 70's showed that the poorer people were, the more likely they were to be honest and the more likely that they would try their utmost to repay their debts. I've never heard this from any other source but it sort of makes subjective sense.

In south africa we are currently suffering from a lack of capacity of electricity and the government has set up a division of eskom (I think) called "Demand side management" which is supposed to come up with ways and means of limiting the demand for electricity. We need some Demand side management programs for individuals to help them manage their insatiable demand for credit. If one managed to solve this conundrum one could gain instant osama bin laden status because of the number of industries it would destroy. It's easy to make up a few sensible rules as when to or when not to use credit but that definitely isn't the answer - nobody wants the rules.

After the movie we were chatting around the table and one of the other film makers asked me whether I had reconsidered being in the card industry and I felt like responding by asking if she had ever reconsidered being in the film industry because there was porn but I held my tongue and laughed.

Making Globalisation Work

Joseph Stiglitz (ex chief economist of the world bank as well as a nobel economics prize winner) gives his view of what is wrong with the current international economics system as well as what should be done in order to address some of the structural inequalities that exist. If anyone is curious as to why the third world seems to be beyond hope then they should read this book - it presents quite a balanced (my view of course) view of what the problems are. Best of all, Stiglitz presents some suggestions for reform of the current system which seem pretty reasonable to me although I dare say that the devil is in the detail. Interestingly much of this book seems to resonate with "The Growth Illusion" although Stiglitz fundamentally seems to believe in economic growth as the solution whereas "The Growth Illusion" questions the fundamentals of economic growth as a driver of living standards. Highly recommended reading although not exactly easy going.

Dysfunctional Capitalism

Notwithstanding what I said in my previous post regarding Adams invisible hand, a couple more thoughts. Competition within certain industries can sometimes lead to undesirable consequences such as a loss of quality. By way of example, the repeated electricity blackouts in the north east of the united states which happened in the early 90's ('93 I think) and then again in the early 2000's ('04 I think). The point is that they happened and after 10 years, the underlying situation had not been corrected and it happened again. My contention is that this is an illustration of competition taken to its extreme where the scramble for customers has driven prices down to such a degree that the business itself is not really sustainable. In order for the companies to provide the cheapest rate they have had to, over time, optimise their businesses to such an extent that if there are unexpected loads there is no 'fat' (excess capacity) available and hence the power outages. Now the question is, why was there not sufficient excess capacity? Did the engineers just miscalculate the demand curve over time? Were there more than one unusual event and the engineers had only calculated the demand from a single unusual event? Was there not enough capital expenditure due to the requirement to make profits or if there were no profits, to merely stay in business?
I think that it is possible for competition to drive prices so low that the quality of the service is undermined and that this is detrimental to the customer, perhaps more so than if the customer had to pay slightly more but have a better quality service. Of course there is the risk that the 'slightly more' just goes to the bottom line and there is no improvement in the quality of service.
Surely, in the same way that competition tends to drive prices down to a point, there should be an opposing principle which prevents the quality of a service from deteriorating past a point. This should be the customer choosing a more expensive quality service over a cheaper option with less quality but what tends to happen is that customers choose the cheapest option and then berate the supplier for not having the quality of the supplier which they rejected.
I think that what I am saying is that there are certain industries, fundamental ones, like electricity and telecoms, where the quality of the service is of such importance that there has to be excess capacity to cater for the unknown and that in these industries, perhaps competition is not the smartest idea.

Adams invisible hand ...

I have a passing interest in economics, can't really explain why and I sometimes wish it really would just pass on and leave me alone. But it doesn't. Picked up my "Dummies guide to Economics" which I am trying to drag myself through just so that I can have a more balanced view of economics after reading "The Growth Illusion". I can't bring myself to just plough through the book so I read it in fits and starts but one particular thing really got my attention this weekend. It has to do with Adam Smiths famous "invisisble hand" theory which basically states that due to competitive pressures between businesses, the customers of these businesses get the best products and services at the cheapest rates due to the competition between them. So even though the businesses may not have their customers best interests at heart, due to competition, they are forced to always become more efficient and hence keep on beating the competition and hence giving the customers the best deal.
Now, to my mind, the older an industry, the finer the margins due to competition and the more the pressure to use technology to stay just one step ahead of the pack. The point I want to pick up is do do with the tighter margins since by definition, this means less profit which would explain why investors are continuously looking around for the next best thing, they are just looking at getting into other industries or companies where the margins are easier. My point is that in mature industries, the customers of these mature industries should be getting the products or services at very close to cost which leaves precious little for profit. How then, do we have real wealth being generated out of these supposedly mature, low margin industries. Thus far I have two possiblities, one that mature industries compete, but only to a point and that point has to do with how little profit the industry as a whole will put up with, not with how low can prices go for the most quality. The second is that maybe the "invisible hand" really isn't visible for a good reason, maybe it doesn't exist since competition doesn't really exist. More on this when I have thought some more ...