Ged Carroll

Category: economics | 經濟學 | 경제학 | 経済

Economics or the dismal science was something I felt that I needed to include as it provides the context for business and consumption.

Prior to the 20th century, economics was the pursuit of gentleman scholars. The foundation of it is considered to be Adam Smith when he published is work An Inquiry into the Nature and Causes of the Wealth of Nations. Smith outlined one of the core tenets of classical economics: each individual is driven by self-interest and can exert only a negligible influence on prices. And it was the start of assumptions that economists model around that don’t mirror real life all the time.

What really is a rational decision maker? Do consumers always make rational decisions? Do they make decisions that maximise their economic benefit?

The problem is that they might do actions that are rational to them:

  • Reducing choice when they are overwhelmed
  • Looking for a little luxury to comfort them over time. Which was the sales of Cadbury chocolate and Revlon lipstick were known to rise in a recession
  • Luxury goods in general make little sense from a ration decision point of view until you realise the value of what they signal
  • Having a smartphone yet buying watches. Japanese consumers were known to still buy watches to show that they care about the time to employers when they could easily check their smartphone screen

All of which makes the subject area of high interest to me as a marketer. It also explains the amount of focus now being done by economists on the behavioural aspect of things.

  • Hudson Institute Economic Update

    This was originally posted to the email list for interesting-people.org as an economic update from the Hudson Institute.

    IRWIN M. STELZER for Hudson Institute 21 June 2004

    When markets talk, politicians would do well to listen. The oil markets are doing more than mere talking — they are shouting for the attention of policymakers who seem determined not to listen.

    First, we have the recent run-up in crude oil prices, which fluctuate around $40 per barrel. That rise was in part due to the fabulous growth of the U.S. and Chinese economies, which sent demand for oil soaring. But a further driver is OPEC’s manipulation of the market, creating a situation in which rising demand cannot elicit the increased supplies that would flow in a competitive market.

    Lesson number one for policymakers: it is no longer prudent to ignore the OPEC cartel, or to rely on it for mercy. Trust busters have had time to worry about less important price conspiracies — the commissions charged for selling old master paintings is less likely to affect the economy than is a conspiracy to fix oil prices — but have shied away from attacking the OPEC cartel. Now would seem to be the time for the voice of the Antitrust Division to be heard above that of the State Department, ever-eager to avoid a diplomatic row with the house of Saud.

    The markets are also saying something about the state of the gasoline market. The margin between crude oil prices and gasoline prices has doubled in the United States, driving refining profits up several hundred percent. Yet, refining capacity has not increased. Oil industry executives with whom I have spoken say that environmental and other permitting restrictions make it virtually impossible to build new refineries. Lesson number two for policymakers: restrictions that were appropriate when crude oil was selling for $10 per barrel and gasoline for $1 per gallon are not economically sensible at current price levels. Revise them to allow more refineries to be built.

    These are important messages from the market. But not as important as the persistence of the so-called risk premium of between $5 and $10 per barrel that seems to be built into crude oil prices. Part of that premium is a response to the continued disruption of supplies from important producers. Terrorists in Iraq periodically sabotage that nation’s pipelines. Unrest and violence in Nigeria, Africa’s largest producer, make that country an unreliable source of oil. Islamic terrorism casts doubt about the reliability of supplies from Kazakhstan.

    Add self-inflicted wounds by important producers. Russia, which rivals Saudi Arabia as the world’s largest producer, Vladimir Putin and his old KGB buddies have frightened foreign investors by jailing the country’s richest oil baron, Mikhail Khodorkovsky. Venezuela’s Castro-loving president, Hugo Chávez, has replaced the nation’s skilled oil industry managers with political appointees, causing a loss of 500,000 barrels per day of production from that important supplier of the low-sulfur oil most suitable for use in U.S. refineries. Iran’s mullahs have stifled the foreign investment that Iran’s oil industry so desperately needs.

    But even these multiple threats to a steady flow of oil pale by comparison with developments in Saudi Arabia. The Kingdom sits on 25% of the world’s known reserves, but that figure understates its importance. The Saudis can tap their reserves for over 80 years without slowing output. And it is well known that the Saudis haven’t really attempted to explore for new reservoirs because they already know precisely where some 260 billion barrels are located. “You don’t plant potatoes when you have a cellar full of spuds,” a grizzled denizen of America’s “oil patch” once told me. Not only are the Saudis sitting on the largest known reserves, and on the cheapest, most easily discovered as-yet “unknown reserves,” they are also the only country in a position to increase production quickly should some other supplier be knocked out of action.

    But Saudi Arabia is no longer the stable rock in a turbulent Middle East sea. The terrorists funded by the Saudis have turned on their benefactors, and are killing foreigners to cause a flight of oil-industry and other trained personnel. They are winning because they seem immune to capture, because many top Saudis insist that it is the Zionists, rather than Al Qaeda, that are causing the mayhem, and because hundreds of thousands of unemployed youths see no future for them so long as the royal family siphons off the nation’s wealth to support its opulent lifestyle.

    Whatever the reason, it is far from certain that the corrupt geriatrics who run the country will be able to head off the threat to the Saudi industry’s ability to produce a steady flow of oil. True, the production facilities are well protected, but by troops of uncertain loyalty. And pipelines are difficult to protect, as are port facilities.

    Final lesson for policymakers: prepare for the day when bin Laden and associates are in a position to topple the Saudi regime and withhold supplies of oil, causing a major economic trauma in industrialized countries and a humanitarian catastrophe in the undeveloped world. That means continuing to build strategic reserves, but much more. Alternative sources of energy for transportation uses cannot be available in the relevant time frame, if ever; places such as Alaska take a long while to develop, and anyhow don’t have enough oil to matter; renewables such as solar and wind power are not replacements for gasoline; conservation can be useful when prices rise gradually, giving consumers time to adjust to higher prices, but not when there is a price explosion.

    I was asked many years ago at a gathering of government and industry experts to lay out an energy policy for America, to cope with a supply interruption. Two words: “aircraft carriers.” That remains true today. Iraq is not a war for oil. The next U.S. intervention in the Middle East may well be.

    A version of this Hudson Institute Economic Update appeared in The Sunday Times (London)

    Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.

    More related content here.

  • Ivan Seidenberg downfall?

    Who is Ivan Seidenberg?

    Ivan Seidenberg is head of Verizon, a U.S. telecoms company based in New Jersey, they jointly own one of the U.S.’s largest mobile phone operators with Vodafone and are provide landlines to Americans living on the eastern seaboard. They are a direct descendant of the Bell Telephone Co. a former telecoms monopoly rather like BT prior to privatisation. Verizon was one of the baby Bells made by the break-up of the previous company. It was originally called Bell Atlantic but has grown beyond its roots by acquisition and joint venture.

    What is a folly?

    A folly is the ruins of a great accomplishment that never gets finished. The English landscape is dotted with disused and crumbling monuments. Many of the follies were made by industrialists who spent the wealth generated by textiles mills, shipyards and heavy industries. A more modern day version of this would be the expensive shower curtains purchased by L. Dennis Kozlowski during the recent Tyco scandal in the U.S.

    What’s the SP?

    In January, at the Consumer Electronics Show in Las Vegas, Seidenberg laid out a plan to spend two billion dollars digging up and replacing the copper cables that lie between the customers house and the telephone exchange, replacing it with strands of glass called optical fibre.

    This is interesting because:

    Verizon until now has been very focused on creating shareholder value, broadly that means working the business in such a way that they keep paying a dividend and the share price keeps going up. In order to do that you need to avoid ‘bet the farm’ type moves, or anything that may unsettle institutional shareholders. One of my frustrations working as a PR consultant agency-side with Bell Atlantic mobile (a predecessor of Verizon) was trying to get my spokespeople to say anything daring, visionary or forward-thinking. We struggled to send out news, even issuing European  press releases about mobile phones donated to battered wives shelters in New Jersey

    • Verizon, historically has made more of a mess in providing value-added services over broadband and wireless services than other carriers like Deutsche Telekom or BT, there is no indication of how Verizon is likely to be able to make additional value out of the investment. Capgemini did a survey of 100 CEOs in the telecoms, media and technology sectors in 2000, which I helped to promote. One of the summary conclusions that came out of it was that everybody knew they wanted broadband, but they did not know what it would be used for, or how they were going to make money out of value-added services. I still believe that to be the case, I have seen nothing that has convinced me otherwise
    • Online and digital entertainment is very much up in the air, no one is sure how the market is going to pan out
    • Content providers will rob you blind, Apple recently said all the 99 cents a track from iTunes Music Service went on credit card transaction costs and record company royalty payments, How will there be room for someone like Verizon at the table?
    • Selling fibre to consumers would disrupt the market for business data communications, driving prices down and causing a corporate bloodbath unlike anything we have seen in modern times. It could annihilate companies like WorldCom who are in the final stages of bankruptcy protection and Comcast who sell broadband DSL services. This very disruptive process while in theory of some benefit to consumers, could still be loaded with many anti-trust issues
    • The economics of putting fibre into the ground are very complex. Putting fibre in the ground is no more difficult than putting in cable. Optical fibre has its own challenges, water must not be allowed anywhere near the fibre, otherwise it will get between its plastic skin and the glass causing a kink that greatly reduces its ability to carry a signal, Despite the best efforts of the likes of Corning this process happens by osmosis, because of this optical fibre is very likely to decay to uselessness in less than ten years; potentially a much shorter lifespan than the copper cable it replaces
    • Generally the denser the population the cheaper it is to wire them up, you don’t have to go miles from one house to another. Verizon covers some of the densest population on the planet and the high rise living of Manhattanites presents its own engineering problems with added expense
    • The biggest barrier to putting fibre into the home has been the cost of the electronics at either end of the cable, these have come down in cost, but not as fast as the cost of computing power or electronic storage. This would still be substantially dearer than a cable box, broadband satellite receiver or DSL router
    • Providing consumers access to huge amounts of bandwidth means that you need to ensure that there are no bottlenecks in the core of the network. Verizon like most carriers are still carrying the billions of dollars already spent in the core of their network as high value assets. Will this have to be scrapped and made over to allow for the new fibre world? How would this affect their balance sheet?
    • Verizon like many carriers relies on declining numbers of traditional voice calls to finance new services including this ambitious plan, how would it finance it and how would this affect shareholders?
    • In order for Verizon to even make their money back on the fibre installation they need the regulators cut them some slack on forcing them to rent the lines to alternative carriers at cost. A practice currently in place to encourage competition in telephone and broadband services

    If Verizon are successful, it may encourage other telcos to do the same thing, they may not be so lucky….

    Ivan Seidenberg and the False Prophet

    The bet by Ivan Seidenberg reminds me of George Gilder a strange mix of techno sage and right-wing evangelist that America is good at putting out. He foresaw a golden age for the information economy brought about by photonics and charged many business executives a whole pile of money for a newsletter about companies that he felt was at the vanguard of the revolution.

    George’s vision hasn’t come to pass, yet Seidenberg’s plan sounds like something straight from the Gilder playbook including the lack of profit imperative. More telecoms related content here.