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