Tag Archives: economics

Bonus Cultures and Ideal Banks, Schools, Hospitals

In light of the ongo­ing debate with regards to the fin­an­cial sec­tor’s so-called ‘bonus cul­ture’, eco­nom­ist John Kay looks briefly at the his­tory of the bonus and why the idea of a ‘bonus cul­ture’ is a “poor joke” (using the example of teach­er and doc­tor bonuses).

At one time, the offer and receipt of a gra­tu­ity was a state­ment of social and eco­nom­ic superi­or­ity on the part of the giver, its accept­ance a state­ment of social and eco­nom­ic inferi­or­ity on the part of the recip­i­ent. To be salar­ied – to be trus­ted to do the job for which you had been con­trac­ted and paid – was a mark of status. Con­trac­tu­ally agreed per­form­ance-related pay – com­mis­sions and piece work – was wide­spread in shops and factor­ies, but has now largely been aban­doned.

The com­mon out­come was that employ­ees came to care more about the quant­ity of the product than its qual­ity. The sys­tem polar­ised the con­flict between the interests of the organ­isa­tion and of those who worked in it. […]

Teach­ers and doc­tors strongly res­ist the intro­duc­tion of a bonus cul­ture: not just because they resent meas­ure­ment of per­form­ance and account­ab­il­ity for their activ­it­ies […] but because they oppose import­ing the cul­ture of assembly lines. They fear an envir­on­ment in which they would be encour­aged to focus on nar­rowly quan­ti­fi­able object­ives at the expense of the under­ly­ing needs of cli­ents.

Even if many teach­ers and doc­tors are incom­pet­ent and lazy, many oth­ers are ser­i­ously com­mit­ted to the organ­isa­tions for which they work, the sub­jects and spe­cial­isa­tions to which they are devoted, and to a broad­er sense of pro­fes­sion­al eth­ics: and it is only people like these who estab­lish the kinds of schools and hos­pit­als we want as par­ents or patients.

The Economically-(Im)Perfect World of Online Games

Kris­ti­an Segerstrale–owner of online games com­pany Play­fish (acquired by Elec­tron­ic Arts for $400m in Novem­ber 2009)–discusses why online game envir­on­ments are excit­ing places for eco­nom­ics research (and spe­cific­ally: “how social factors influ­ence eco­nom­ic decision mak­ing”):

When eco­nom­ists try to mod­el beha­vi­or in the real world, they’re always deal­ing with imper­fect inform­a­tion. “The data is always lim­ited, and once you get hold of it there are tons of reas­ons to mis­trust it,” Seger­strale says. In vir­tu­al worlds, on the oth­er hand, “the data set is per­fect. You know every data point with abso­lute cer­tainty. In social net­works you even know who the people are. You can slice and dice by gender, by age, by any­thing.”

Instead of deal­ing only with his­tor­ic­al data, in vir­tu­al worlds “you have the power to exper­i­ment in real time,” Seger­strale says. What hap­pens to demand if you add a 5 per­cent tax to a product? What if you apply a 5 per­cent tax to one half of a group and a 7 per­cent tax to the oth­er half? “You can con­duct any exper­i­ment you want,” he says. “You might dis­cov­er that women over 35 have a high­er tol­er­ance to a tax than males aged 15 to 20—stuff that’s just not pos­sible to dis­cov­er in the real world.”

Of course, there’s a fairly obvi­ous caveat:

One pos­sible flaw in this eco­nom­ic mod­el is that the kind of people who spend hours online tak­ing care of ima­gin­ary pets may not be rep­res­ent­at­ive of the rest of the pop­u­la­tion. The data might be “per­fect” and “com­plete,” but the world from which it’s gathered is any­thing but that.

Licensing and Patents for Green Technology and Drugs

The Seed Magazine ‘pan­el’ (who?) was asked How can intel­lec­tu­al prop­erty be adap­ted to spread green tech?

Their short answer starts by look­ing at drug licens­ing (the last sen­tence is quite shock­ing):

By World Trade Organ­iz­a­tion law, if a pat­en­ted drug can improve pub­lic health in a devel­op­ing coun­try, it’s avail­able for com­puls­ory licens­ing. That means that devel­op­ing coun­tries can make gen­er­ics of the drug while pay­ing a small roy­alty instead of the full fee to the patent-holder—a prac­tice that makes pat­ent-hold­ing com­pan­ies deeply uncom­fort­able. To date, the only drugs so licensed have been anti­ret­ro­vir­als to fight AIDS in Africa.

The pan­el then go on to look at the pos­sib­il­ity of, and issues with, extend­ing this form of licens­ing to also cov­er ‘green tech’:

Strong pat­ent laws have sig­ni­fic­ant bene­fits. Should com­pan­ies lose trust in patents—should they fear that their ideas will no longer be fin­an­cially respec­ted as theirs—they have an incent­ive to make the ideas cor­por­ate secrets instead of pub­licly avail­able pat­ents. The European Pat­ent Office fore­sees the bur­geon­ing of such leg­ally pro­tec­ted secrets should pat­ents be rendered less bind­ing.

Mak­ing tech­no­logy pat­entable and thus prof­it­able has indeed been a good way to encour­age com­pan­ies to invest in ideas that serve the pub­lic good. How­ever, when bil­lions in the devel­op­ing world who could bene­fit from these ideas can­not afford the cur­rent sys­tem, we need to con­sider how it can evolve.

Environmental Assumptions

Big busi­ness is envir­on­ment­ally destruct­ive: a wide­spread and almost unques­tioned assump­tion. A false assump­tion, accord­ing to Jared Dia­mond, not­ing that profits often arise from green ini­ti­at­ives and envir­on­ment­al con­cern is of inher­ent import­ance to many large cor­por­a­tions.

The story is told through the lens of Wal-Mart’s trans­port and pack­aging ini­ti­at­ives, Coca-Col­a’s con­cern “with prob­lems of water scarcity, energy, cli­mate change and agri­cul­ture” and Chev­ron’s policy of rigour­ous envir­on­ment­al pro­tec­tion (of which any­one who has read Dia­mond’s Col­lapse, will be acutely aware):

The embrace of envir­on­ment­al con­cerns by chief exec­ut­ives has accel­er­ated recently for sev­er­al reas­ons. Lower con­sump­tion of envir­on­ment­al resources saves money in the short run. Main­tain­ing sus­tain­able resource levels and not pol­lut­ing saves money in the long run. And a clean image — one attained by, say, avoid­ing oil spills and oth­er envir­on­ment­al dis­asters — reduces cri­ti­cism from employ­ees, con­sumers and gov­ern­ment.

It’s not just big busi­ness we make assump­tions about: as Tim Har­ford points out after read­ing Prashant Vaze’s The Eco­nom­ic­al Envir­on­ment­al­ist, some typ­ic­al envir­on­ment­al decisions are some­times based on incor­rect assump­tions:

Envir­on­ment­al­ists have been slow to real­ise that the fash­ion­able eco-life­style is riddled with con­tra­dic­tions. The one that par­tic­u­larly exas­per­ates me is the “food miles” obses­sion, whereby we eschew toma­toes from Spain and roses flown in from Kenya, in favour of loc­al products grown in a heated green­house with a far great­er car­bon foot­print. Oth­er less-than-obvi­ous truths are: that pork and chick­en have sub­stan­tially lower car­bon foot­prints than beef and lamb (yes, even organ­ic beef and lamb); that milk and cheese also have a sub­stan­tial foot­print; that dish­wash­ers are typ­ic­ally more effi­cient than wash­ing dishes by hand; and that eco-friendly wash­ing powders may be dis­tinctly eco-unfriendly because they tend to tempt people to use hot­ter washes.

Jared Dia­mond piece via Mar­gin­al Revolu­tion

Advice from Economists

Jim Rogers—co-founder of the Quantum Fund (with George Sor­os), eco­nom­ic com­ment­at­or, guest pro­fess­or of fin­ance at Columbia Uni­ver­sity and author of A Gift to My Chil­dren—provided a short inter­view with the FT dis­cuss­ing his thoughts on mak­ing that first mil­lion, on trav­el­ling, and some gen­er­al advice to the next gen­er­a­tion.

What is the secret of your suc­cess?

As I was not smarter than most people, I was will­ing to work harder than most. I was pre­pared to exam­ine con­ven­tion­al wis­dom.

  • Do not under­es­tim­ate the value of due dili­gence.
  • For [the next] gen­er­a­tion, Man­dar­in and Eng­lish will be the most import­ant lan­guages.
  • If you give chil­dren too much, you will ruin them. I want my chil­dren to be well-edu­cated and exper­i­ence the work­place. [On not passing much fin­an­cial wealth to his chil­dren.]
  • Invest only in things you know some­thing about. […] Stick to what [you] know and buy an invest­ment in that area. That is how you get rich. You don’t get rich invest­ing in things you know noth­ing about.

Fur­ther advice, this from Tyler Cowen:

I told [my step­daugh­ter] to take cal­cu­lus and stat­ist­ics; even if she hates them she’ll know what side of that divide she stands on.  I am encour­aging of learn­ing lan­guages, driv­ing mod­est Japan­ese cars, and order­ing the most unap­peal­ing-sound­ing dish on the menu of a good res­taur­ant.  On invest­ing it’s buy and hold all the way.  Use TimeOut guides when you travel and when you are eat­ing in third world coun­tries avoid walls.  I’m not a big fan of debt; debt is worth it only if you’re earn­ings-obsessed and I don’t recom­mend that for most people.  Don’t expect to be too happy, that is coun­ter­pro­duct­ive.  I’ve men­tioned that future job descrip­tions may be quite flu­id and unpre­dict­able from today’s vant­age point.  Being “good with people,” com­bined with smarts and a focus on exe­cu­tion, will nev­er wear out.

As with all art­icles that dole out advice, there’s some gold in the com­ments.

Jim Rogers inter­view via Tim Cold­well