By Bhagwad Jal Park, on August 18th, 2009
In my earlier post on the Mechanics of Cartels, I opined towards the end that being a good guy might actually be a reasonable strategy in a competitive world. In an environment where everyone else is being a cutthroat, it seems unreal to be decent and trustworthy. But in this article, I am going to show that there are unique benefits to being a good guy, being trustworthy, and not stabbing people in the back.
George Herbert once said, “Honor and Profit lie not in one sack”. And indeed, we read many stories about how the honest person lives a life of penury, whereas the dishonest crook is always rolling in wealth. However, I believe that the dishonest person can only go so far. After a point, they cannot get any richer without becoming honest. It’s like a chess player who has great talent, but hasn’t studied strategy. They can be great club players, but to reach the top league, they have to learn hitherto un-studied theory.
Image Credit: godchased
In cartels, we have seen how doubt about another person’s trustworthiness can cause the cartel to break up. As an example, in India, the iPhone was released by two major companies (Airtel and Vodafone) almost simultaneously. When I say almost, I mean that Vodafone released it one day after Airtel. In the United States, the iPhone costs only $200. However in India, it was released for $775 by both companies. They had obviously come to an agreement beforehand that they were going to release it together at that price.
Perhaps someone here who knows more can enlighten me as to whether or not they could have been taken to court for that for violating anti-trust policies?
In any case, it must have been an interesting negotiation complicated by the fact that Vodafone released the iPhone one day after Airtel committed to selling it at $775. If the next day Vodafone had released the iPhone for say $300, Airtel would have been devastated. No way anyone was going to buy it from Airtel for $775 if Vodafone released it for $300!
Vodafone had a chance to cheat on Airtel and capture the entire iPhone market share. Yet they did not do this. Why? Were they too decent? Did they feel sorry for Airtel? Did they feel that they can’t let Airtel down? After all, I’m sure there was no written contract. That would most certainly be illegal.
I am confident that Vodafone did it because they have to be perceived as trustworthy – not only by Airtel, but by the whole world. If Vodafone had reneged on it’s implied contract, they would lose their image as a trustworthy business partner. In the modern day world, large portions of wealth are created by partnering with others. And these partnerships frequently require that each party stick their necks out for the greater good. No one wants to do business and form a partnership with someone who is untrustworthy.
Vodafone gave up some of it’s short term profits in order to gain long term credibility. How can you make sure that other people view you as a credible person? After all, they cannot look inside your head. They have to gauge you by your actions. I had written an earlier post on how people use signals to form their opinions. By not letting Airtel down, Vodafone signaled to the rest of the world that it was a good and trustworthy business partner, and thus laid a stronger foundation for it’s future business practice.
So we see that,at least in this case, selflessness is just another way of being selfish in the long run. Of course, it’s much easier to be selfless if you really feel like being selfless. Maybe this is why nature has given us the capability to feel this way. Perhaps this is why nature has implanted us with concepts like righteousness, trustworthiness, and honor. Because as I said, in the long run, they pay off.
By Bhagwad Jal Park, on July 31st, 2009
I discussed in a previous article how the the economic system has become an entity unto itself, and how it needs to feed itself to keep alive. The irony is that it has no consciousness. It is a machine that we have made with our own hands, that has turned against us. Today, we will see how it makes us Zombies without us realizing it, and in fact, makes us think that we’re free agents!
In order to keep the wheels moving, every single person in even the not so developed countries, has been fed the fallacy of success. Years ago, success was living the ‘American Dream’. Nowadays, when so many people are well off, they are required to achieve more and more. In fact, they are required to achieve the impossible.
 Image Credit: RobW_
What is this ‘Impossible’ achievement? Short Answer – Success. Success, as portrayed by every bill board, and TV advertisement refers to a state of wealth, good looks, career satisfaction, and loads of free time. Take the average billboard advert depicting a successful man. He invariably has the following characteristics regardless of what is being sold:
- Good Looking
- Rich, or drawing a huge salary
- Well Dressed
- Lots of women falling for him
- Lots of free time (Either Golfing, or Yachting, or just loafing generally)
- Young
- Physically fit
- Talented
- Knows what he is doing, and is confident
This image is so compelling, that most don’t take the time to look at it carefully, and realize it’s stupidity. First of all, it is practically impossible for a man to be so naturally good looking, and fit. Second, it portrays a lie, in the sense that, in real life, successful people are overworked, and rarely have the luxury to focus on anything other than their work. Third, the attributes that are displayed often have nothing to do with the product that is being advertised.
There are so many things wrong with this picture, that the deeper one looks at it, the more ridiculous it seems. It is wrong to assume that all this is obvious. People are fed this lie, and most people aspire to be like that. And when they can’t, they feel inferior to something that they can never achieve. To feed this complex, they are driven more and more into buying themselves items that they feel will push them towards that ideal.
The ideal depicted above, is just one sort of ideal. There are others like a father with his kids, having a great life because he has Life Insurance! Anyone reading this, will understand what I’m talking about.
These lies go unchallenged by our “Commonsense”, because they engage our emotions instead of our rational thought. If people were to logically decide whether or not they need something, they would be able to make an objective assessment, that would frequently lead them to reject the item being pitched. By engaging the emotional cravings people have, marketeers bypass their logic, and go straight to that part of their nature that is illogical by definition.
This is why I say we are slaves. Thinking ourselves free, we are manipulated by ‘the system’, of which, the corporates who feed us these lies, are unwitting tools. It is not to be supposed that they have any choice in the matter. They are doing what they are being forced to do by the economic system. Which is why it is so difficult, if not impossible to lay the ‘blame’.
I feel that human society, just like a single person, has stages of maturity. These stages can last for hundreds of years. It is my hope, that one day, we will all see the lie for what it is. I have faith in man. This cannot last forever. And what will we do when the lie is exposed? I cannot even imagine.
By Bhagwad Jal Park, on March 26th, 2009
The RIAA will soon have it’s day in court when it has to defend itself against an outraged public.
Throughout history, major steps in the progress of nations have come about through landmark court cases. Whether we take the Dreyfus’s case in France, or the slew of court decisions in the United States in the 60s to end racial prejudice, we see that when public opinion reaches a boiling point, then the law itself changes in a rational way to accommodate the new sense of right and wrong.
The courts have always been at the forefront of detecting new ideas, concepts, and understandings of fundamental freedoms. With the advent of the Internet, a flood of new problems relating to data protection, communication, and privacy have come up, and one by one, the courts are having to decide the status of each one. For example, the recent decision on whether or not linking to a defamatory website is itself defamation decisively defends the freedom of a person to give their own views and cite another’s opinion.
Image Credit: sandrino
One such landmark case is on the horizon, and the end is predictable. The legality of p2p file sharing will soon be decided. And I’m willing to stick out my scrawny neck and say that p2p file sharing will have the stamp of legality. And with no restrictions. No patrolling, and no traffic shaping.
Why am I so sure? Because it makes sense. Even if the courts do not immediately agree to it, they will sooner or later. Because that is what history has shown us. The EU has already struck down France’s Three Strikes Proposal.
The RIAA is right to be worried. People often feel that CD’s are overpriced and that the Recording lables charge too much for each song. This is true. However, they are forced to do so. Recording Labels take huge risks when they support any new artist by publicizing them and promoting their albums. Most of these artists will be failures. To compensate for this, the labels simply have to charge high rates for songs that do succeed. Of course, this means that successful artists can holdup the lables and demand higher rates. To mitigate this, the labels bind their artists to them with contracts that prevent them from running off.
The RIAA does have some valid reason to feel that the p2p file sharing of mp3s is hurting them. No doubt there is some loss there, but not to the extent that it publicly cries out. We’ve already discussed earlier on how software piracy is not really theft.
The point however, is that the RIAA needs to recoup their losses that arise from supporting poorly performing artists by charging exorbitant prices from the public for the songs of the successful ones. This is the main reason for file sharing. Apple has shown using itunes that people can and do pay for songs and software if it is reasonably priced. Perhaps a day is coming when artists can bypass the recording labels and sell their songs directly to the public at a much lower price. This is obviously something that the labels are scared of since it undercuts their entire raison d’être.
The reason that file sharing will be legalized is simple. At the end of the day, you simply cannot place a restriction on what people do in the privacy of their homes without causing damage to anyone. Opportunity Costs don’t count as damage, unfortunately for the RIAA. If legislation dictating what people can and cannot do in the privacy of their homes is ever enforced, it will result in the creation of a police like atmosphere that will give people the feeling that they are being watched. And that is something that cannot be tolerated for long.
It’s obvious that the RIAA doesn’t understand this. That is why they are claiming that even ripping legally puchased CD’s is illegal! (See the first paragraph in the second heading). They are frustrated and clutching at straws, desperately trying to retain some authority when the very rules of the game have changed. It’s only a matter of time before they lost big time in court, and will have to accept the new environment as it is. Wait for that day. The US would have progressed once more.
By Bhagwad Jal Park, on March 17th, 2009
I’m a big fan of TV series like “24″ and “Lost”. My wife and I eagerly watch episode after episode and get completely involved in the characters and the storyline. In fact, we begin to identify with each character and their mannerisms to the extent that we “latch” onto the main figures. We would give way to howls of outrage if say Kiefer Sutherland who plays “Jack Bauer” were to be replaced by someone else!
Image Credit: TCM Hitchhiker
My greedy Game Theory mind immediately latches onto this scenario as a means to extort money out of Television Series producers. In my earlier article on the benefits of holding back patents, we discussed the problem of holdups. Holdups are situations where party A has the potential to cause massive damage to party B after the initial assessment has been made and work set in motion.
In the case of patents, this meant that if you have invested millions in making a factory, then I can hold you up by acquiring a patent on a crucial process that is mandatory with your current setup. In the case of the TV series, this means that an actor like Kiefer Sutherland who has already been ingrained into the hearts and minds of millions of fans, has the ability to hold up FOX networks. Each series has 24 episodes. Suppose after the 10th episode, Sutherland demands a 300% raise from FOX, he would be holding up the network.
The key element here is that Sutherland is irreplaceable as “Jack Bauer” and that after airing 10 episodes, a substantial investment has already been made. These two factors are critical for any holdup and not just with TV Series.
It’s useless to say that FOX has a contract with Sutherland, and that Sutherland will forced to continue acting at a pre-arranged rate. Acting is an art, and Sutherland’s “performance” can just drop, he can lose the special way in which he says “You gotta trust me on this!”, or he can just come down with an inexplicable fever. There are many ways in which he could execute a holdup without breaking his contract.
So why doesn’t he? I guess there are two reasons. One, Sutherland may be a “good guy” and not greedy. Fortunately, as we say earlier, all humans are not rational. After all, he’s an actor and not a game theorist! Second, his reputation will suffer irreparable damage if he were to indulge in this kind of behavior. Assuming that Sutherland wants to pursue an acting career after the series gets over, it’s in his best interests to be a “good guy” and stick to the contract. In other words, a “repeat game” ensues.
But if Sutherland wanted to just amass one time wealth and live out the rest of his life in luxury, there would be nothing to stop him from holding FOX to ransom for huge sums of money. This means that TV networks should also be careful of actors who are getting old and are thinking of retirement. These actors have nothing to lose by their reputation being damaged, and can capitalize on their years of being decent by one massive holdup were they to ever get a chance! It short, never trust an old fart.
I can imagine that in the future, virtual actors will eventually replace real ones, and not just because they’re cheap, but because holdup problems can be averted. After all, virtual actors are your slaves and don’t have an agenda of their own. Given this inevitable future, I would be very worried if I were an actor just starting out, since my future is at stake. If everyone thought like this, then there would be a shortage of young actors and the asking price for young actors would go up…….
But no one thinks that far. Not young actors anyway. So don’t expect a shortage anytime soon. But the future of the TV industry is definitely set for a change. You can bet on that.
By Bhagwad Jal Park, on March 10th, 2009
I’m an avid reader of history. I’ve read a lot of it from various cultures over various time periods. Chinese, Indian, Russian, Roman, Norse, and Greek. I’ve also read just about every single major piece of mythology that exists on Earth, and I have come to an interesting conclusion – No matter what the changes in the Environment are, no matter how much mankind has ‘achieved’, the human condition has not changed.
What I mean by this, is that the net sum of happiness and misery in the world has remained more or less the same. In spite of our economic success, our inventions, and our knowledge, man is still the same person, facing the same problems (albeit in different ways), and dealing with them in the same way. The only thing that really seems to have changed, is the relatively less amount of outright injustice, like slavery, or witch hunting.
But witch hunting has not ended. It happens every day, when we need a scapegoat. It’s toned down of course, but it’s not ended. Humans never change.
What then, I am forced to ask, has our economic success really provided us with? It has eased our lifestyle. But is that so important? I have become so soft and weak, that I wonder if it’s a boon, or a curse. Has it set me free? Not at all. The free market has removed the explicit forms of control, and has replaced it with insidious ones like subtle advertisements, and peer pressure.
In fact, our economic system has turned into a monster. In intelligent, living monster, with a life of it’s own, and it’s own interests. It was created to serve humans. It was created painstakingly, to make our life more secure. But like the fantasy novels, where the robots that man has created, become self aware, and rebel against mankind, the economic system has turned around and enslaved us.
What food does this monster eat? The food is our desire. The economic system is greased by the money that circulates due to purchases that people make. If people never bought anything, companies would go out of business, and the building blocks of the system would be destroyed.
If the beast stayed within it’s limits, and provided for mankind what mankind actually wants, then it is indeed a great boon. But the beast has it’s own life. It wants more and more, and so, ensures that we are bombarded with things we don’t need, convincing us that it is essential to our happiness. Such is it’s perversity, that it even makes spend what we do not have through credit cards.
To say that we are in control, is a fallacy. Each one of us is powerless in the face of the giant corporations that rule our lives. We’re like worker ants. We imagine that we’re serving ourselves, but all the time, we are doing exactly what we are required to do, dutifully, and even joyfully. The corporations themselves are slaves to the even bigger forces of the share market, and external forces like government regulations, taxes, and oil prices.
The more we think about it, the scarier it becomes. We are so insignificant in front of this beast, who nonetheless needs us, that it’s frightening. Is there a way out? Probably not. For that, all of mankind must mature, and evolve spiritually. But as mentioned in the beginning, man is the same, and always will be.
By Bhagwad Jal Park, on January 6th, 2009
“Oh my God Johnson, our stock has dropped to nothing. We’re ruined!.” Not the greatest quote from TV, I grant you, but when I watched Robocop 3 a decade ago, it struck my little mind that the share price of a company can make it or break it. And not just the firm, but the employees as well. In “Fun with Dick and Jane,” Jim Carrey convincingly pulls off the image that if your share price falls, it spells doom for the employees too.
Image Credit: artemuestra
But when I studied Finance in my MBA, I never quite understood why companies cared so much about their stock price. After all, haven’t they already sold the shares in the IPO? And how can they control what the public thinks about their company anyway? It always seemed to me that people bought and sold stock based on their reputation, not on detailed analysis of their books. How can companies care so damn much about what people think about them?
Recently when there was a rumor that Steve Jobs had a heart attack, Apple’s share price dropped. There are two issues here. First of all, I’m not sure that the loss of Steve Jobs would have that great an impact on the performance of Apple. One doesn’t consistently produce great products for decades due to the genius of one man no matter how great. So there’s no reason to believe that the performance of Apple is going down if Jobs goes.
Second, I’m sure that everyone believed that it was just a rumor. But the funny thing about the stock market is that it doesn’t matter what you believe or don’t. And it doesn’t matter what everyone else believes or doesn’t either – what matters, is whether or not you believe whether or not others believe! If you believe that others believe that Steve Jobs had a heart attack, you must sell. If you thought that others were smart not to run at the sound of rumors, you would not sell either.
How in heaven’s name can companies seriously believe for one single moment that such whimsical things as the highly unstable temperaments of day traders mean anything at all?
I have read several reasons why companies have good reason to care about their stock price. Some reasons that I’ve heard are:
- The management owns a huge percentage of shares. Their personal wealth depends on the share price.
- The employees receive bonuses based on the share price
- Financing companies look favorably on companies with a good share price. Lower debt deals
- Hostile takeovers
- Prestige
Out of these, only the first and fourth reasons seem good ones. I can sympathise with the management if their personal wealth is inextricably linked to the company. Though if I were in their place, I wouldn’t place all my eggs in one basket. Who the hell would do something like that?
And of course, the threat of having your company taken over is a very real danger. A good reason to keep your price high.
However, I don’t understand why number 3 should exist. Don’t financiers look at the real performance of the company based on the accounts and other concrete information? How can they get any idea of the performance of a company solely based on the share price? Or is this one of those “Collective wisdom of the crowd” mantras?
Lots of questions.
I’m not a stud corporate worker and I probably don’t understand harsh realities of the corporate world. Maybe these guys have many more reasons to keep their share prices in the public market high. But I can’t see them.
By Bhagwad Jal Park, on December 23rd, 2008
Retailers live for the holidays. As a former store manager myself, I should know! The excitement, the agony when you’re store is not full, and the tensions of over stocking, understocking, and too many more to mention. However, this year’s season sales have been lower than last years. Black Friday wasn’t as big a hit as retailers had expected it to be. And this is attributed to the economic downturn.
We all know how the system works. Consumer spending is a chicken and egg situation. One that is known only too well to economists. When consumers spend, profits go up, which are disbursed as salaries and dividends to people who use that money to spend even more and so it goes. Japan’s efforts to bolster consumer spending were flawed because people were not convinced that things were going to improve next year and so kept the money as savings instead of spending it, undercutting the point of the entire exercise.
Image Credit: tico_bassie
One major reason for people not going out and buying with abandon, is guilt. They want to, and they love to! But should they give in to the sinful feeling? As a gift giver, the best gift you can give to someone whom you care for, is a brief moment in the shop when they can buy anything they want.
A few days ago, my wife told me that she didn’t know what to give a friend, and whether she should just give cash. She was also considering a gift card but thought that it would just restrict the receiver to one single store. At that moment, the whole concept of gift cards rolled out before me, and inspired this post.
My reasoning was that gift cards are a much better gift than cash for several reasons. In the first place, it’s more tasteful. There’s something squeamish about giving money. It’s somewhat crass. In addition, it means that you’ve not put in any thought into the gift. Anyone can give money.
Secondly, gift cards are more tangible than money. For example, if someone gives me cash, I will head straight to the bank, and put it in. I will spend it of course, but along with my other money. The benefits of that particular gift are spread out over a period of time and become indistinguishable from the things that your money will normally buy. You can’t point to anything and say “I got that as a gift”.
Finally (and most importantly), gift cards have to be used! When I get money, I save it. I put it in investements and when I go to a shop, I never think “Hey, I just got $XXX from so and so, and thereofore I can buy that much.” Instead I feel guilty when I want to buy something even though I have extra moeny, because I know that I need not. If I don’t buy something then I save the money! More often than not, a gift of money does not affect my willingness to spend.
Gift cards on the other hand, provide the ultimate shopping experience – that of guilt free shopping. I remember as a poor college student, I got an award, the prize of which was a gift card from a book store worth the equivalent of $25. It was an experience I would not forget. The freedom to walk into a shop filled with books, and pick up anything I wanted! And not just one. I could choose two, maybe even three. The best part of the experience was that I was being forced into buying those books. If I didn’t buy then, the gift card would be a waste and I would not benefit in any way. The only way for me to benefit was to buy the books. Of course, I would have preferred cash(!), but having got the gift card, I experienced something that mere money could never have given me!
So now you know how to treat your loved ones to a great time! Giving them concrete gifts shows thought and care – unless it’s money – but to really make them happy, give them an experience as well as a gift. Something money can’t buy. Just be careful you give the right gift card to the right person. No point giving a Barnes & Noble gift card to someone who doesn’t like books or giving a Macy’s Gift card to someone like me. In fact, the choosing of the correct gift card for the right person, shows the thought and care that a real concrete gift would.
By Bhagwad Jal Park, on December 18th, 2008
We recently saw that Yahoo had removed the so called “Severance Benefits” that it had planned to implement were it ever subject to a hostile takeover. In this article, we take a closer look at this mechanism as well as how effective “Poison Pills” like this can be.
A Poison Pill is a strategy employed by companies to ensure that the existing managment is not harmed by a hostile takeover. We know that takeovers can be accomplished by more ways than one. In the recent interactions between Yahoo! and Microsoft, there was a threat in the air that Microsoft would either replace Yahoo!’s board members with those more sympathetic to it at the AGM, or buy up a dominating percentage of Yahoo! share.
Image Credit: Steven Fernandez
Yahoo! management has every right to be afraid of something like this since it would be quite likely that Microsoft would want to replace a number of Yahoo! managers with their own people. In order to prevent this from happening (After all, no one likes to lose their jobs), Yahoo! enacted a clause that in the event of a hostile takeover, Yahoo employees could avail themselves of massive benefits by walking away.
These massive benefits would of course financially harm the company effectively raising the cost of the takeover by hundreds of millions of dollars. This “Poison Pill” is like a suicide attempt. The threat is, don’t try and take me over, otherwise I’ll self destruct.
The question is, is this threat credible? In Game theory, a credible threat is one where the person who is making the threats actually benefits by carrying out the said threat. By this logic, if a robber takes hostage a single victim, threatening to shoot him if the police came in, would he actually do it? After all, killing the hostage provides him with no protection afterwards and will probably only increase his sentence! The only reason why he would ever carry out his threat and kill the hostage, was if he was insane. A perfectly rational robber would never kill a single hostage. This is why it is sometimes best to be insane.
The situation is strikingly similar when discussing corporate Poison Pills. It’s reasonable to assume that Yahoo! management holds a considerable stake in the company, and harming the company will harm them too. Moreover, the Poison Pill will be swallowed only if the hostile takeover succeeds. Assuming that the Pill is swallowed, this cannot reverse the acquisition. What then is the purpose of swallowing the pill? It is just a threat, and not a very credible one. The managment doesn’t gain anything by swallowing a pill that hurts the company after the acquisition has taken place.
One can devise a Poison Pill in such a way that it reduces the effectiveness of a hostile takeover by allowing existing shareholders (But not the acquirer) to purchase shares at a discount. This means that having bought a certain percentage of Yahoo! (in this case, 15%), Yahoo! shareholders can then get more shares at a huge discount. This means that the percentage of shares owned by Microsoft will come be less than 15% and may not be enough for a takeover. This is called a Dilution Poison Pill.
Will this be effective? Let’s say that Microsoft has bought 15% of Yahoo! stock for tens of billions of dollars. That money is a sunk cost. Once they’re bought, they’re bought. Microsoft must treat this as a sunk cost, and continue to buy up more Yahoo! shares to gain a controlling interest since the additional cost of buying the shares is much less than the amount already sunk in. So this Poison Pill holds no threat either.
The only way that the management can effectively threaten to swallow the pill, was if they were considered insane. Unfortunately, the Insane argument doesn’t really work in a corporate environment. In fact, an insane management has no right to run the company at all. And thus the Poison Pill threat is negated.
By Bhagwad Jal Park, on December 9th, 2008
Over the Past 10,000 years, mankind has seen technological advances unlike any other age. According to the World Book Mulitmedia Encyclopedia, Homo Sapiens emerged between 300,000 to 400,000 years ago. Compared to that sort of time scale, 10,000 is just the latest generation!
But my opinion is that this technological age is coming to an end. Not because there are no longer any things left to invent. That is far from over. The “technological dark age” will come to pass because of the way things currently are. There are forces in our world whose sole purpose is to maintain the status quo. And technology is a threat to those forces.
Image Credit: greekadman
A few centuries ago, the individual played a very important role in the advancement of Science. The greatest discoveries in the last century itself have all been due to individuals. Alexander Fleming, Heisenberg, Einstein, Dirak and too many more to mention. The greatest inventions all have the names of people attached to them. The light bulb (with a carbon filament), the aeroplane, the telephone, and the printing press.
In the modern day world however, the individual no longer has this claim to greatness. There are two reasons for this. In the first place, there are not many things that are unknown at first glance. Our ancestors could look around them and find questions. How high is the sky? Why is it blue? What are stars? How the heck is lightning formed? These days, all phenomena that is apparent to us is readily explained. There are still things to be discovered to be sure. However, in order to understand what we don’t know itself requires a considerable degree of expertise. For example, I know that we’re all searching for the elusive Higgs Boson. But to really understand why it’s so important and why it’s difficult to find requires a high degree of proficiency in theoretical physics. Simply getting to starting point is difficult enough.
Secondly, most technological inventions have been spurred by laziness. We thought candles were too much of a bother so we needed the light bulb. We thought that manual calculations were too difficult to so we made the computer. Walking is a pain, and so we built the automobile. There are many more things that can make our lives easier, and in that sense, there is certainly scope of innovation. But the rules have changed.
There are plenty of good ideas that we read about every day that will substantially increase the quality of our lives. Imagine for a moment that we find out we can easily harness Solar Energy for our energy requirements. In order to make it technologically feasible, considerable research needs to go into it. This research needs money. I can imagine Oil Companies being very interested in this research. Not in order to further it, but to throttle it. Nothing could be simpler for them, than to talk to one person, buy his or her patent for their latest invention, and let it collect dust on the shelves.
Suppose a new technique of communication was discovered that didn’t require us to use AT&T’s infrastructure? You can be quite sure that AT&T will lobby hard to throttle it pretty soon. Certain technologies take time to mature even though they may not be ideal at first. It took decades for the Airplane to be accepted as a viable way of travel even after the Wright Brothers had demonstrated their feasibility.
Another example is how major corporations like the RIAA are trying to throttle p2p. The RIAA would be exceedingly happy if the entire Bittorrent technology was scrapped, along with all the good that comes of it. But why go so far? The RIAA claims that even ripping CD’s to your harddisk is illegal. They would be happy if that technology was scrapped as well.
Similarly, corporations are trying hard to ensure that DVD’s can’t be copied.
The danger is something like Mark Elivins’ High Level Equilibrium Trap which attempts to describe why China’s technological growth came to an end and missed the industrial revolution. The current situation was just so comfortable that it didn’t warrant any need for future invention.
In my opinion, we are fast heading to a technological stagnation where only incremental changes on existing technology are allowed to flourish by those who benefit from it. Large corporations have every interest to see promising technologies crash and die in order to avoid the inevitable changes that they will bring if allowed to go forward.
By Bhagwad Jal Park, on December 1st, 2008
Mortgages on houses, and in fact all situations where the payment of a certain service is spread out over a period of time, change the laws of economics in a curious way that sometimes leads to grotesque results. The particular law I am talking about here is the law of supply and demand.
Occasionally, in order to clearly see the mechanisms of a process, it is necessary to isolate the elements involved and view them without extraneous factors. This leads to the “Thought Experiment” or gedanken in German. The Gedanken is a frequent tool in theoretical physics, and here I intend to use one in economics. I am going to imagine a particular scenario that is not theoretically impossible and examine the workings of that scenario to better understand the forces that we are interested in. An earlier example was my article on the Cost of youth. So here goes.
Image Credit: ocean.flynn
Imagine that we have an Island with a hundred people living on it. This island has only fifty houses however. The law of supply and demand has raised the prices of the houses to a particular level that allows only fifty people out of hundred to afford it. The rest will live in shacks, make shifts or find another alternatives. The important thing is that there are fifty houses, and all fifty of them are occupied by the richer half of the population. The fifty people are paying ready cash. No mortgages.
Under the circumstances, this is a fair arrangement. After all, everyone can’t have everything. Sad as it may be for the fifty people who are left out, it can’t get any better than this. Since space on the island is limited, more houses of the same sort cannot be built.
Now, imagine a twist in the scenario where people no longer need to have ready cash at hand, but can spread out their payments over a period of time. Perhaps over a period of 30 years. Suddenly a lot more people can afford the houses at the price level that was earlier set since they need not pay everything at once. Therefore, the demand for the houses goes up. Unfortunately, the supply being constrained cannot keep up with the demand. So what happens? The prices of houses go up. What initially cost a 100 units one time payment, now costs over 15,000 (say) units spread out over a period of 30 years. Again, the exact price will depend on how much the fifty richest people can afford to pay.
The end result is that the same fifty people now occupy the same fifty houses (since they are still the richest) but at a much higher price than they would have paid without the whole mortgage system. This is one side effect of the mortgage structure, in that it artificially raises prices to the level that you have to spread out payments over several years. But this by itself (ridiculous as it may be), is not really unfair. The real catch arises during an economic crisis.
Say now that the economy slows down and over 80% of the people lose their jobs. This means that out of the fifty richest people who were living in the houses and were paying monthly payments, forty of them can no longer do so. As a result, they get kicked out.
End Result: 100 people on island, and 50 houses. However, only ten houses are occupied! Forty houses are too expensive for anyone to afford. Is this possible? Is it logical? Is this not grotesque? The banks that foreclose the forty houses are reluctant to drop the prices since they incur a loss on their balance sheets if they do so.
What went wrong? Two things. First, the fifty houses artificially boomed the prices of the houses to unimaginable levels. Second, it lead to a situation where hardly anyone could afford anything.
Doubtless in the real world, there are many other factors that can either mitigate or aggravate this scenario. But that doesn’t mean that the forces at work in our imaginary island are non existent. The purpose of this article was to isolate and view in undiluted glare, the tendencies that arise due to mortgages. In my opinion, the idea that you can pay for something over a period of time is counterproductive and ultimately makes everyone’s life miserable because in the long run, prices increase because of it and the same people get the same goods that they would have got if the mortgage system wasn’t there.
I rest my case m’lud.
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