An important issue regarding economic development and growth is that of the development of regions. In a world dominated by technological innovation and the notion of knowledge economy, the development of regions takes a particular meaning. Lets take the case of the Silicon Valley, where a great agglomeration of high technology companies are gathered. The fact that those companies are at proximity of each other gives place to the possibility of mutual learning by constant interaction. the more people working in companies will be in contact with each other, the more they will be able to profit from each others’ experiences, which will lead to increasing output in terms of improved products and processes.
However, after a few decades of offshoring jobs for the sake of short term gains, the American industrial sector was characterized by a long period of relative inactivity. If people don’t work, they don’t experiment new things and therefore don’t generate new knowledge with which they can improve products and processes. The result of these industrial policies of cost cutting can now be felt when foreigners registered more patent inside the US that American citizens.
While American firms where comfortably cashing on previous investments in developing American technological skills, Asian countries where keeping up with the hard work until now, where they have overtaken the American firms. Let’s take the new and emerging Nanotechnology industry. Asian countries like Japan, Korea and China own a great deal of patents in this sector. Basically, what this means is that those regional advantages that can be associated with a lot of people being very competent in nanotechnology is not inside the US. That increasing return associated with people learning from each other and continuously improving their products and processes is situated in Asia.
What is really striking is not that Asia has overcome a clear advantage owned by the US. What is really striking is that the general sentiment in the US is really not focused on these important issues. If we believe social media such as Facebook, Youtube and Twitter, what really draws popular attention is celebrity gossip rather than important issues. The ship is sinking and no one even seems to be aware!
IT seems like a small and forgotten incident, but China did attack Google not long time ago. Now, it is YouTube that is banned in Russia for being extremist. Some might want to downplay this event as being merely and incident by claiming that the service is also blocked in countries such as Saudi Arabia, Syria, Turkey and Iran. The problem is that in those countries, the service is blocked because of so-called religious reasons. Nudity and voyeur’s cams was what got the service blocked. The Sheiks were fed up with seeing their wives dancing naked on YouTube…
In Russia, this taboo around nudity and sexual content does not exist. Therefore the movement of blocking YouTube is one of rejecting the whole concept of User Generated Content, where everyone can post their own videos. Maybe Kremlin thinks that social media is bad for democracy…but wait…they don’t care about democracy!
Maybe it’s time for the White House to retaliate and force Twitter to suspend Medvedev’s Twitter account.
It was a matter of time before internal BP documents show that the company had serious security concerns about deep water drilling. The question is: why did they still do it? Why didn’t they take all precautions to avoid this mess?
The reason is simple: corporations are not immediately punished by market laws when their actions have a perverse effect on the economy at an aggregate level. By aggregate level, I mean the sum of all economic sectors. By definition, corporations in a free market are not directly concerned by what happens in the economy as a whole. As long as there is a market for their goods and services, they can go on and not worry about the rest of the economy.
In BP’s case, a couple of million gallons of oil in the gulf of Mexico will have perverse effect on the economy at aggregate level: fishers and tourism are just two of of economic sectors that got damaged mostly. However, BP is not going to pay for that. Not unless international courts can 1) prove that BP acted irresponsibly and broke rules, 2) measure the cost of aggregate losses, and 3) compensate those who were harmed by BP.
About the first condition, i.e. proving that BP did something irresponsible, it is as hard as hell. It took years for courts to force tobacco companies to display something that has strong scientific background, so why would it be different with oil? Then, measuring aggregate loss is just another impossible task. Measuring the impact of the oil spill will take years of study and will require comparing after-spill data with pre-spill data while proving that the changes are linked to the oil spill. Finally, compensating the victims of the oil spill will not going to be enough especially in the case of people who have gone out of business because of the spill. How can we measure the compensation of someone who lived out of fishing for 20 years and that wasn’t able to do so because of the spill? And what about all those forms of life that have died because of the oil spill? They will hardly receive any form of compensation…
What all this means is that the economy is always in risk of being the victim of irresponsible corporations who will always get away with the losses that they inflict on other sectors of the industry. Maybe it’s time for Obama to nationalize oil. Doing so will mean that aggregate economic benefits are always going to be taken into account when drilling is concerned.
When looking at monopoly theory there is a theme that occurs quite often: price discrimination. This is when monopolists charge whatever they feel like to whoever they feel like. No one can do anything because, well, there is no one else that offers the same good. Also, a firm who would want to innovate and compete with a monopolist will be in a weak position because there is no real market to build on and because switching to the new product/brand is too costly for the market. So governments have put in place antitrust laws to protect consumers and industrial sectors against the tyranny of the monopolist.
In the banking sector, things are quite different. Big banks own pretty much everything today. Yet, no one has though of putting a size limit on banks. One of the reasons why banks got away with imminent bankruptcy due to unsound financial practices is because the US government did not have the choice to bail them, because they were “too big to fail”. Letting them sink would be the same as letting the economy sink, because … well … banks own everything! So what if there was a size limit on banks? Some kind of anti-trust law against their assets size?
Basically the idea is like: your so big that you could hurt the economy if you act irresponsibly? Well your not allowed. We don’t trust big bankers!
Ethics has a special meaning when it comes to free market societies. Capitalism, it is said, offers to all the freedom of choosing a trade that they find fit to them. A society governed by the free market ideal does not impose any behavior on its citizens as long as it does not breach others’ freedom. When it comes to practice, thing are a bit different. In a free market we cannot really choose just any trade. It has to be trade that the market needs. For example, if I want to live out of laziness and non-productivity, chances are that I will starve to death. Of course, there are exceptions for Paris Hilton and Kim Kardashian! To be a bit more serious: if I want to be productive and make people laugh, it has to be something funny to others. Basically, what this means is that we are free to chose a trade that will meet the needs of the market. Therefore, free market isn’t really free. Only the dead are really free!
And those who are alive, must be careful to have the right set of skills so they can always offer something that is worth exchanging on the market. To some extent, there is no real need in helping others. In fact, helping others could be bad since it would create more competition on the market! Helping others can only be good when it bring some benefit to us. And here begins the issue of free market and ethics. In reality, ethics doesn’t really exist in capitalism. There aren’t any moral code of conduct or ethical constraints. There is one and only one kind of constrain: market needs. But what if market wants ethics?
Why would the market want more ethics? The law of supply and demand stipulates that something which is rare and for which there is high demand will have a high price. If one day, the invisible hands wakes up and asks for more ethics, then the law of supply and demand says that people will rush to offer more ethics.But now the question is: will those who offer ethics offer real ethics or some product or service that is disguised as ethics? If they offer fake ethics, the market’s response will be to reward those who will offer real ethics until all those who offer fake ethics run out of business!
And what will happen then? There won’t be any free market! All will have to be working hard at having high moral standards instead of competing against each other. That will be the death of the free market.
Isn’t that silly?
The age of privacy is over and Google is pushing for more personalization on the web. While the benefits of customization are great for productivity and user experience, there is always a trade off with privacy. In fact, customization cannot peacefully coexist with privacy because who ever want’s to offer it needs to kind of spy on every thing we do to understand what interests us. Since personalization is so useful and that privacy is also very important, we will have to ask a fundamental question about how much privacy we are going to give away for the sake of personalized information.
We could look at this problem from an extreme point of view: mobile dating services. These new services connect people based on geographical proximity. So if two users are in the same area they will both be notified of each other being around. But to deliver such a service, people need to give away their location and this is where problems start. Sociopaths could use this information about people whereabouts to target them and eventually threaten their security.
At another level, giving private information away can be dangerous in the age of identity theft. We saw that the Chinese government attacked Google with the intention of stealing private information on dissidents. Hopefully big firms will be able to provide good security protection but this is not going to be the case with smaller firms. Unless a government body puts security standards with tight control in place this kind of information theft is most likely going to plague the next years.
Finally, history has shown that corporations cannot really be trusted. The main issue with corporations is that shareholders often have needs that are diverging from the needs of society. Giving away information to big corporations means that something bad can happen in the near or mid term future. While we are good at evelising states like China, we tend to forget that corporations can sometimes be able to harm people.
In a recent post, I was concerned with American sentiment weakening on the idea of the American dream. My main view is that this is the effect of the economic struggle American middle-class is going through. American middle class is struggling because worker productivity growth was disproportional to wage growth. In other words, what happened was that American workers got ripped off. But the question is how did they get ripped off?
American Dream origin: a motivation tool
When I read Adam Smith’s major work “The Wealth of Nations”, I was struck by his view about slavery and the reason why it was a bad idea. According to the father of classical economics, slavery is bad because it incites slaves to produce for as little as possible since their compensation will never go higher than the modest food, clothes and shelter that are given to them to keep them alive. This is an excerpt from book 3 chapter 2:
But if great improvements are seldom to be expected from great proprietors, they are least of all to be expected when they employ slaves for their workmen. The experience of all ages and nations, I believe, demonstrates that the work done by slaves, though it appears to cost only their maintenance, is in the end the dearest of any. A person who can acquire no property, can have no other interest but to eat as much, and to labor as little as possible. Whatever work he does beyond what is sufficient to purchase his own maintenance can be squeezed out of him by violence only, and not by any interest of his own.
According to Smith, the main benefit behind capitalism as a economic system is to encourage all to be more productive by giving the right to own stuff. This is precisely where the American Dream comes from: the idea that by working hard enough, we can one day be proprietors and not have to work anymore!
But here lies a dilemma.
The American Dream is incompatible with capitalism
What happens when all workers are proprietors? One thing is sure and it is that Adam Smith didn’t really like the idea. Let’s take a look at book 1 chapter 8:
What are the common wages of labor, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labor.
It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combination, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, a merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.
A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation.
When workers accumulate capital, their immediate need for money is lowered. As a result, they have a stronger position when negotiating for wages. This is precisely where the dilemma lies: from one hand, employers need to motivate workers by giving them a share of what they produce but on the other hand, they need to take that away from them so that workers will agree working for less.
What kills the American Dream
Earlier in this post, I talked about the disproportional growth of wages with productivity. Well, this is precisely in accordance with Smith’s view that workers should be deprived of their wealth so they would agree to work for less. When employers do not compensate workers for improvements in productivity, they are depriving them from achieving the American Dream. When speculators create bubbles on the stock market, they are taking people’s saving from them and thus killing their American Dream.
With 10% unemployment in the US, it seems like workers will have a hard time finding jobs in the need future. Even those who will find jobs will never be able to get back what they lost since the beginning of the recession. With Bank of England predicting another downturn, fears of a double-dip recession are almost confirmed. While a few speculators will keep on promoting the ‘economy is recovering’ nonsense, this big news confirms fears expressed by those who were against stimulus cut policies.
My biggest concern with this recession is that we will see a new wave of layoffs and plant closures and most probably another crash of the market. With money printing machines running at full spin, financial institutions have created a bubble out of capital that doesn’t cost them anything, i.e. near zero percent interest. While things might seem ok given the recent rise of stock markets, the real economy is suffering because of high unemployment. If people can’t buy anything because their unemployed, then it is a matter of time before another market crash happens.
It’s very sad, but it looks like the American economy is trapped in a vicious circle that will only stop when wages reach very low levels. The real problem with unemployment in the US isn’t really due to the fact that new technologies have emerged and that they are displacing previous needs in labor skills. Pretty much everything that used to be consumed on the planet is still consumed today. Therefore, it isn’t a lack of demand that is causing unemployment. It is off-shoring of jobs that used to take place in the US that is killing labor. And this is the result of wrong policies, or policies that were aligned with short-term objectives of the private sector. In other words, American policymakers did a poor job on preventing firms take harmful decisions for the country. In fact, they have helped those firms have their way even more easily.
Now, the situation is that US-based manufacturing is no longer competitive. A sector that used to be the most productive in the world is now incapable of facing competition coming from developing countries! In my opinion, there is no way jobs are coming back to the US. We will have to get used to the idea that unemployment will be around 10% for a while.
With evidence that Chinese hackers where behind Google attack and China denying involvement in the attack and important question is raised about security enforcement on the world-wide-web when computers are connected through an open standard, but that countries do not adhere to political standards!
Law enforcement for international cyber-crimes
Lets say some guy attacks Yahoo website from a MIT computer lab and that cybersecurity professionals trace the origin of the attack and find the perpetrator. What happens is that since the crime was committed in the US, law enforcement officers simply proceed with prescribed measures. This is a simple case where computers in a geographical region are connected and that the region is governed by the same legislation.
However, when cybercrimes are committed in geographical regions that are governed by different laws, then there needs to be protocol between those two countries to exchange proper information so that cyber-criminals get proper reprimand for their actions. This protocol is very much implicitly accepted between countries who’s computers are connected through open protocols. That’s because the protocol is designed to guarantee security, or at least guarantees that the origin of an attack can be traced. So when two people connect their computers together, they are saying: “We’ll do the necessary when someone uses one of our computers to attack the other computer”.
Now, if a cyber-crime happens and that the country from which it happened refuses to cooperate with the other country, then it is somehow saying that it does not want to have its computers connected with the other country anymore! So if we take the case of China here, it is saying that it cannot guarantee that proper measure will be taken to punish those who attacked Google. The funny thing is that by acting this way, China is somehow confessing that it has orchestrated the attack!
So why does China want to unplug from the World Wide Web?
If we take a look at the historical events that led to Google’s attack, it all started with China asking Google to filter-out improper content to which Google has complied. But it seems that Google’s compliance policies had its limits which was followed by a hack that was targeted at obtaining information about Chinese dissidents. Of course, Google has so much information that it is the target for those who want to terrorize populations.
Political reasons
Now, the situation has gone to the point where these computers connected through the HTTP protocols can be the bearers of ideological battles. People exchanging freely on the Internet could lead to people asking each others questions which could lead to people asking questions about themselves. And everybody knows what happens when a population becomes self-aware: revolution.
So the natural thing to do for China is to cut itself out from the Internet. Well, not the whole Internet, just the outside-of-China Internet. So the plan is to have a Nation Wide Web or Chinese Wide Web, which amazingly has the potential of having more surfers that the other World Wide Web!
Economic reasons
The other aim of the Chinese government in cutting itself from the Internet is in an attempt to slow down the growth of American web firms. American firms have a lead in Internet products and services. So as Chinese consumers get access to Internet connections, they will be better using American services like Facebook and Twitter because those are the platforms on which most people are connecting to.
But if China cuts itself off, then it can have a nation-wide program of services similar to Facebook and Twitter and wait that they get as big. So the idea is to not give business to the US and keep that business to itself. This makes a lot of sense for a country that has known tremendous growth from exports and that is struck with a global crisis that is leading to protectionist policies from its once major clients. China has to learn to have growth from within and it is taking draconian measure to achieve that.
At first sight, it seems that social media in China might have an adverse effect on Chinese people’s opinion about socialism, but the truth is that Chinese government is going to hire tons of ’social media gurus’ who in reality are going to push for socialist ideals. Instead of having bloggers praise Apple iPads and Google Android, they are going to have bloggers praise China’s greatness. After all, marketing is not only a matter of capitalism.
StartUp Visa Act: The Only Good Foreign Entrepreneur Is A Dead Foreign Entrepreneur
Those who have read my recent post about the state of US innovation capabilities, won’t find difficult to imagine my confusion with the StartUp Visa Act where the US is willing to grant visas and permanent residency to foreign entrepreneurs who are able to – read carefully – raise American dollars! Yes, foreign entrepreneurs who raise money from American VCs. I would like you to take a minute to enjoy the significance of this situation.
In the StartUp Visa Act, permanent residency is offered to those who will be able to create jobs (at least five) and attract/make $1 million in the first two years of the company. Of course, nobody is asked to invest their own money in the US. They are asked to create jobs with money that American VCs are going to invest.
So the message that the senate is sending out there is that this means that there is more money than what the economy is capable of doing with. Of course the madness with which money printing has taken place in central bank could be the cause for this situation. But then again, why bringing people from the outside when unemployment is at 10%? Even worst, unemployment is between 7% and 10% in San Fransisco bay area, one the most innovative places on the planet. I am sure that plenty of people willing to start up a business can be find in that area. Some of them will have everything that it takes to run a business with success. So why this need to hiring entrepreneurs from aboard?
Well, the answer is very simple and it has something to do with the fact that foreigners are taking over American technology markets and that they are moving at a faster pace than the US in international markets. So it’s not that the US doesn’t know how to innovate, it’s more that the US forgot how to innovate better than others. Or we could say that others have learned to innovate better than the US. What ever the angle from which we look at it, the US is losing ground in the international innovation scene.
Basically, the idea with the StartUp Visa Act is to stop creative people from creating somewhere else than in the US. This is the USA’s strategy to stay competitive in global technology markets. The idea is to deprive other countries from the people that could make use of other people. This also appears to be a long term strategy if we consider the recent policies regarding state university endowments.