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.

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.

Even more frightening, if it is true that other economies are emerging, then it is more important for American firms to go out there and get international patents, so they can own global markets who are now more attractive because of the said emerging economies. But what we observe here is the complete opposite and we see that America’s international position is weakening.

Now, like if all this wasn’t enough, American state universities will see their budgets shrink for around $3 billion. This is added to another $3 billion that was removed from budget last year. In other words, US administration is expecting a miracle since it is hoping that cutting costs will actually lead to more productivity from scientists. Now, taking into account that knowledge is created and transferred to firms from universities, investing less in universities will most likely lead to worse results in terms of innovation. Therefore, the only logical explanation to US administration’s cut in university endowment could come from it’s intention to offshore eve more of it’s innovative capabilities. Maybe the idea is to fight it’s own lack of innovation by bringing-in innovators from outside the country.

Corporations aren't evil on their own.

People often wonder why corporations turn into anti-social entities that end-up doing more harm than good to the customers. My view is that all corporation end up acting in accordance to shareholder interests which can be in conflict with public interest. This is the tyranny of shareholders on a social level.

The concept of tyranny of shareholders initially expressed the contradiction between what is good for a corporation and what is good for the shareholders. For example, laying off talented employees could be bad for the corporation but good for the shareholders who will increase profits.

In this post, I call the tyranny of shareholders the contradiction between shareholder interests and society’s interests. Indeed sometimes, something can be good for shareholders but bad for society as a whole. For example, offshoring  research and development activities could be good for shareholder who will again increase profits but bad for a society because it loses innovative capabilities.

My view is that society must protect itself from powerful agents who could have conflicting interests with the public. In other words, governments should prevent big players from performing things that will end up harming society under the justification that it’s in the shareholders right to make a profit.

How did that happen?

Taking into account that Americans consume close to 25% of world production and that they have a trade deficit, this is definitely not good news. Of course, a deeper study of patent assignees might show greater involvement of American firms in obtaining USPTO patents. This will most likely be the case since American firms are still very active in terms of innovation. However, what this means is that US firms have already started a wave of off-shoring research and development activities. Now this would be the case, this would be even worse news than just having a bad output of US-resident patents for a year or two.

Why off-shoring of R&D is bas for US economy

Innovation is what gives competitive advantage to nations. And for nations to innovate, public policies should be in place to encourage firms to invest in local research and development capabilities. If this kind of policies are not in place, then firms might be tempted, in the same way they are for production operations, to off-shore R&D somewhere where it is cheaper. The problem here is that unlike off-shoring of production operation that have negative effects in trade deficit, off-shoring R&D has a negative effect on innovation capabilities and therefore on the competitive edge of a country.

In other words, American firms are doing the most stupid thing of training other countries in becoming more competitive and are at the same time losing their own competitive edge. I guess this a good example of how being greedy can sometimes be a more expensive approach. Of course, the effect of this kind of policy will no be felt until a certain while. Therefore, my American friends can relax for the time being.

More data please

I just found out that information is the hottest commodity in the US. I guess it explains why everybody is brainwashed since 45% of that data comes from TV. There is also 37% of it that comes from the Internet but since we can choose what to read or watch, I guess it is less brainwashing. Of course, this is true for those who search for content that is not related to what they see on TV. Because does who look for things they see on TV will end-up brainwashed twice.  However, since most of the people search for stuff from TV, brainwashing becomes the biggest business in the US. Soon, Wall Mart will have to change its brand and become Brain Mart. Their slogan: “Always Cheap Brains”.

First, I would like to clarify this concept of social media not having business model. I actually do believe that social media have a business model. And their business model is about the famous whole being greater than the sum of its parts. The extra value that comes out of the sum of its members is the business model. The problem in my opinion is that current business community does not recognize this value yet. What I mean is that while investors firmly believe that social media are valuable but that social media does not have as much income as it should. Think of Facebook that had negative cash flow while being valued at $4 billion. And where is their income coming from? Advertising!

Social media are forces to get income from advertising because business practices have not accepted the fact that the Internet has a tendency to minimize profits. For example, if you want to buy shoes from two stores that offer different prices, you might pick the one that is next to your home, even if its asking for more. But this is not the case for the Internet: all websites take the same traveling time and offer more or less the same conveniences! So what happens with time is that sale prices will tend towards cost prices, hence minimizing profits.

Now to come back to our airplane Internet issue, and most especially the advertising that will most likely come with it, if it is true that most business travelers will pickup an airline that offers Internet, then why not charge those travelers? Let’s imagine a world where the aggregation of all global traffic will set the value of a website, i.e. a website that has that much traffic has as much value. After all, Internet surfers who use free services still have to pay their ISPs, don’t they?

Now, if Internet becomes an advertising-based free service, what will happen to the value of social media’s? Its going to go down because there is less people clicking on advertising. This means that the whole concept of business value is changing on the Internet. We cannot just take old rules and apply them on the Internet because it won’t make sense. The Internet should have a different value model that is not based on the classical service exchange or barter principles. I say no to advertising on airplane Internet.

History shows that the US was involved in many antitrust actions (think of AT&T). How come it is slowing down now? Simple answer: globalization. Competition going global, the American government does not oversee market at national level anymore. Today, American companies must compete on a global scale, against emerging countries that have a very centralized view of the economy (ex: China). In other words, American companies might end up against players that own near 100% of their local market.

Having to face this situation, American policy makers have decided to adopt a laissez-faire strategy that will lead to more merges and serious restructuring of some industries. The idea is to have a couple of big players with unmatchable potential for economies of scales.These players will be the undisputed market leaders in their sector.

While this is good news for American companies, it is quite different for the Europeans. If American companies get bigger and more competitive, then European companies might start having problems in their own markets. This is precisely why European policy makers are pushing for antitrust legislation to be exercised upon major American antitrust activities.

How is the good manager to deal with this situation? Should he tell his team members about what he has learned from his own bosses or keep that information for himself? In one hand, giving the info to the team will jeopardize the project and our manager won’t be a good manager. On the other hand, not sharing information with his team will make him a bad manager in the ethical sense.

Most people will say that staying loyal to his boss will be a safer option in the near future. After all, the manager is there to make sure results are delivered for the firm. But if rumors go out that he was aware of something but that he did not give notice to his team, he will build himself a reputation for being a snake. Well, my opinion is that this kind of situation is a real test on one’s leadership skills. The real question is: will the manager be able to give the bad news to his team, but still be able to motivate them in going forward, thus ensuring the projects delivery?