Tag Archives: Economics

New Economy vs. Old Economy – where the future is going

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Yesterday I posted an article about AirBnB focusing on how it’s upsetting entrenched businesses, neighbors, and has attracted the attention of the NYC AG. I had intended on having a much longer discussion but ended up going down the rabbit hole with that topic. I was influenced to do that article by an article in CS Monitor about the growing backlash against the sharing economy. That article did discuss AirBnB, Uber, and a few other sites. I suggest reading it.

While that article focused on the sharing economy, there’s quite a few other companies that are causing problems for entrenched businesses because of the way they’ve structured their businesses. One of the most prominent companies doing this is Tesla Motors. Tesla has upset a just about every single car dealer in the US. Why? Well, as an attempt to encourage growth of multiple types of car companies the US and many states forced a separation between car dealerships and the manufacturer of the cars. This has worked extremely well for car manufacturers because they are able to push cars to the dealers and the dealers can get them for a discounted price and then sell them to their customers. The US is pretty unique in this approach – it’s why there’s those megadealers all over the place. Tesla is more closely modeling their distribution network off of Toyota where they build a customer for life and build to order. Toyota in Japan is so flexible they can meet an order and have it delivered within a week. Tesla has decided to have “showrooms” where people can look at the car try it out, but they can’t buy it. They have to order it online. Car dealerships are pushing for legislation and suing Tesla over this. I believe that Tesla’s model will work for many consumers but not all. It should be interesting to see how this plays out.

Another area that’s interesting is Twitch.tv, which has turned watching your friend play a video game into the next big thing that ESPN already missed out on. For those unaware, Twitch allows people to stream themselves playing video games and interact with their viewers directly by reading chat and talking to the chat or typing back to the viewers. Through this, games like League of Legends, StarCraft, DOTA, Street Fighter, and first person shooters has turned into a $20 million dollar industry just for tournaments. It’s replacing how people watch “TV” and engage with the people that are watching. These tournaments are pulling 200,000 viewers on just about any given weekend with several thousand in person to watch the event. Each game type has their own celebrities, heroes and villains. It’s still early, but it is going to pull people away from cable and from watching ESPN. I would not be surprised if ESPN began to show some of these events. It might take a few more years, but it’s going to happen.

Finally, the other interesting area where the new economy is threatening the old economy is the Silk Road. The Silk Road was an online blackmarket that used Bit Coins as it’s only accepted currency. It was wildly successful before its owner was recently arrested with approximately $80 million in BitCoin or about 5% of the total currency in circulation. This is the cut that this person made, which means it’s likely that hundreds of millions of dollars flowed through the site selling drugs and other material. With it’s collapse this market is likely to follow a similar path as the music pirating industry. Effectively there will be more security, less people will know what the Silk Road’s replacement is (I heard about Silk Road about 6 months ago) and it might be more dangerous to use. From all reports Silk Road was relatively safe to buy drugs from as the drugs were simply mailed to the user and it cut out the distribution channel where a bulk of the violence occurs.

I think that these types of business models will likely continue to flourish, it’s likely that we’ll see a lot of new types of business models that build upon this. I’m interested in seeing what’s going to happen.

New economy vs. old economy

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With the rise of the so-called “Sharing Culture” there’s been a recent upswing in the types of business that focus on connecting people point to point with others that can provide services that people need without a lot of the fuss of other intermediaries. There are, of course, a few pioneers in this type of activity, Napster, Kazaa, but also more “Legitimate” companies, such as eBay, PayPal, and Craigslist. These caused disruption, but not on a seriously massive level. eBay expanded the amount of people that could or would auction off their goods. It more likely impacted the amount of garage sales or donations to Goodwill. Craigslist did have a negative impact on newspaper’s income – however newspapers were having other issues because people just weren’t buying them, so it was somewhat moot. Now, however, there are companies springing up that are impacting much larger less “fringe” portions of our economy.

I first heard of companies like this while in the Netherlands where some of my friends were using Couchsurfing. Which connected people that were passing through an area for a night to two to crash on someone’s couch. I don’t think any money was exchanging hands. I believe that this site was a natural precursor for AirBnB, which has gotten in a lot of hot water lately. This site, for those unaware, allows people to rent out rooms of their house or their entire house for short periods of time. The idea is that the renters can use the stuff in the house and have a cheaper place to stay compared to a hotel. While the owners are able to rent out unused space. For instance, I could rent out my third bedroom if I wanted too.

A lot of people aren’t happy with this notion. For one, it does violate a lot of zoning laws and people are pissed about their neighbors renting out rooms to god knows who. Secondly, it does violate those laws and New York City has decided to do something about that. They’ve asked for information on 15k users in the city. This will likely be a large blow to membership there. If users feel that they are likely to be hit by a law suit or forced to pay licenses to rent out the rooms, renting the rooms will be much less appealing. This of course will thrill hotels as they can continue to enjoy a higher cost.

Part of this stems from the fact that this is new and scary. People don’t understand the change. Part of it comes from the fact that the city doesn’t want people to do this instead of normal rental agreements which “protect” both parties in different ways. An AirBnB arrangement is very different and likely has a lower level of protection (mostly social norm based rather than legal based). Part of it probably has to do with money. The city likely earns less taxes from people renting rooms this way than from Hotels.

These types of differences are going to be occurring on a more frequent basis. We need to help steer the conversation as internet savvy folks and look into how we can create accommodations for both sides. I’m not saying for the hotels, I’m talking about for your neighbors and community. Work with them to help them explain what’s happening, why it’s happening, and what they can do to help develop the social norms for websites like AirBnB rather than destroying it before it has a chance to be successful.

I’m hoping there will be a lot more experimentation in these types of sites even if I never use them. I firmly believe that it’s your house you should be able to use it as you see fit as long as it doesn’t cause harm to other people. Having a two way conversation and educating the different stakeholders involved is crucial to ensuring the survival and continued experimentation in these spaces.

Economics, Philosophy and Science

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The Occupy Wall Street movement has spawned a great deal of branch protests. It has increased our awareness of economic, educational and governance issues. We have seen a series of aggressive police actions and amazing responses from victims. Historically, universities have been a sites of unrest. Berkeley had it’s riots in the 60’s, there’s the famous Kent State shooting picture and there are many other examples. What do much of these have in common? The state has used it’s authority and power to overly aggressively clamp down on protesters. However, violent protesters can’t be accepted, but non-violent protesters cannot be met with force. It’s part of our heritage to protest the government.

However, it’s important to understand what we’re protesting and why. It was clear from the beginning of the OWS movement that most of the people didn’t really understand what they were protesting. Very broad general things like Wall Street making too much money or the fact that no one has gone to jail. I think it’s important that for protesting to be effective the leaders and a majority of the protesters need to be well educated on what it is exactly they are protesting.

In this case the protesters needed to be educated on economics and philosophy/morality. Why economics, those guys are like the bad guys man? Well, sadly, to have an actual conversation with these people you need to speak their language. You don’t have to actually accept their assumptions as true or accurate, but you need to be well educated on the topics. Additionally, if you are well educated on economics, you’ll know there are different capitalist perspectives on economics that indicate that a more equal society is a safer and happier society. Using evolutionary economics, policies can be crafted to help protect economies from crashes. In addition, being educated in slightly beyond the basic supply demand curve, it will help prevent the wool from being pulled over our eyes. This will also allow more members of our society to enter public discourse and understand and speak intelligently about the topics that impact all of us. People will actually understand what socialism and communism actually mean.

In addition to a good economic ground work, we also need to understand some basic philosophy. People are accused of moral relativism, we need to know what it actually means (morality is flexible based on the situation) and how that impacts people’s actions. We also need to know when our leaders are behaving morally, immorally and what sort of freedoms we should be giving to people. Our country is founded on the philosophical ideas of the enlightenment. The US government was founded on rights, which all people should have regardless of sex, race or whatever. This includes speech and protest. If these are within our rights, then we need to protect them from people that believe it is their right to physically assault you when you exercise your rights. Morality and ethics can also drive our legislature to define laws based on humanist principles to ensure living wages and the right to live for all people. Or at least the need to create the social mobility claim to have in our society. Decreasing costs of education reduces the initial burden after school which allows people to take more risks, which may allow them to move from one social strata to the next. These should be done for moral reasons and because education and research has been shown both neoclassical economics and evolutionary economics to be a huge driver of sustained economic growth.

We also need a strong scientific foundation, which will provide a healthy dose of skepticism for government and data published by any group on either side. It gives the tools to decide if we should accept these data or open our tool box and figure out where the flaw in the data is. Science is the driver of current economic growth. It is what allows the next big break through at the platform level. We’ve had several platforms, coal, steel, rail, and we’re currently on the silicon platform/computing platform. To develop new platforms we need to continue to drive to the frontier of science.

Our founding fathers embodied these ideals. Jefferson was a philosopher that wrote his own version of the bible. He and Franklin were both accomplished scientists. All of them believed in the rights of the people that exist not because they are given to them by the government, but because they are natural rights all people have. It is important that we acknowledge these rights and make sure we are educated in these topics to ensure an actual debate over the problems we’re facing as a society. Without being educated in the importance of these topics we’ll begin to argue based on the best sound byte and not on the content of the message.

In closing, all people need to become literate in these topics to provide the best foundation for an argument. Without being able to speak the right language, you’ll sound like whining children that’s wondering like a child lost in the woods, or out of your element if you will. With these tools, anyone can talk coherently and powerfully against the very things our own government protests in other countries.

Unintended consequences of knowledge management regimes

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There are several consequences of the differences between the US (and the west) and China (and other autocracies). First, with one of the major assumptions of neoclassical economics out the window, it calls into question basing economic policy on neoclassical economics. Second, with a monopoly structure for intellectual property several different economic incentives have been created. Finally, the differences in IP management between the countries creates tensions at several different levels. I’ll discuss each of these points in more detail.

First, if one of the major assumptions for economic policy includes non-rival, non-exclusive knowledge, it’s difficult to understand why there isn’t more competition in many markets. However, as we know it’s not really possible for any firm to pick up any sort of technology and start to produce a given product. Because of this difficulty regions and areas tend to become experts at specific types of technologies. However, even in the case of China the freedom of access to IP makes it easier for firms to produce specific products. The problem still lies in the fact that you still need tacit knowledge to actually make the product. A patent is supposed to give you the information you need to produce the technology. However, the actual patents are difficult to read and not likely to be possible

Second, with a monopoly structure in place for intellectual property it gives very different incentives for owners of intellectual property. First, for people who actually produce a product, attacking products that are similar for infringement can be a very lucrative proposition. It prevents other companies from becoming competition. Apple is currently using this tactic to go after Android through Samsung and HTC. With a full monopoly technological progress can actually come to a standstill. An example of this is with Xerox copiers. With the monopoly in place Xerox did not innovate and kept prices extremely high. As soon as their patent ran out the competition came in and almost took all of the market share from Xerox. They introduced lower priced products and a wider more personal product range. Without the monopoly in place other companies could try to move into the market space earlier and drive innovation from the beginning of the market.  Finally, with reduced ownership of IP there will be less patent trolls like Intellectual Ventures.

Third, the IP management is causing issues between firms and the Chinese government. The firms do not want to give up their IP because it’s how they are able to make their money. Some of these technologies are so easy to copy it’s impossible to make a profit without protection. In theory pharmaceuticals should be perfectly copyable based on the chemical properties of the drug. If the pharmaceutical companies didn’t have a chance to recoup the investment on a drug (500 million – 1 billion per drug) there would be no innovation. The differences present problems for trade and agreements between countries. The US and China have had serious disagreements over how IP should be managed.

Basically, the differences in how IP is understood impacts a countries policies economically and in trade. It is important to understand exactly what’s going on with these issues. Our governments are pushing for different levels of control over IP both in patents and other forms of copyright. As some one interested in policy, it’s important to understand what types of policies we should be pushing for. I don’t think there’s any true right answer for the IP problem. In different situations policies should be adjusted. We cannot have a stagnant IP regime when technologies are evolving as fast as they are.

Are democracies or autocracies better with technology Management?

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According to neoclassical economics knowledge is a non-rival (I can use it without preventing you from using it) and non-exclusive (available to everyone) resource. This has two impacts on their economic theory. First, the actual impact of research and development is excluded from economic growth and is ignored. Second, that any company should be able to pick up and produce any technology. Both of these points are relatively ridiculous. For two reasons. First, we know that research leads to the formation of new companies. Second we know that most companies cannot produce any product and many companies that produce products outside their expertise fail at it.

From a neoclassical perspective democracies are terrible at sharing knowledge and technologies. Democracies have a slew of laws that regulate access to technology form monopolies for specific technologies if they have something called a patent. Additionally, there are other contracts that can get in the way of sharing of knowledge in a way that is neoclassical. Non-disclosure agreements and non-compete clauses. If you aren’t allowed to discuss a specific technology with other people, it prevents knowledge from spreading and being shared to other companies. If you aren’t allowed to compete within the same industry after you leave a company, it prevents you from using that knowledge in a positive way at another firm.

These laws have been put into place in our democracies to ensure proper protection of technologies for firms. It’s designed to prevent the spreading of tacit knowledge from company A to company B. As a company this is incredibly desirable. Without these protections some research would be worthless to conduct. Knowledge spill-overs would cause prices to fall to cost or lower as firms compete for market share. It’s great for consumers, but bad for firms.

So what happens in China? Well according to Make it in America, China requires many firms to hand over their Intellectual Property to the Chinese state. What ends up happening after this is that the Chinese government sells the information or gives the information to one or more Chinese company. These companies tend to be made up of former employees at the company that made the product before. This allows tacit knowledge transfer to the firm and a fast ramp to compete directly with the inventor of the technology. The knowledge is freer in China than it is in the US because of this. This increases competition and may be impacting the cost of goods like solar panels.

In a way this type of behavior forces companies to compete based on the actual costs of the technology. This is what is expected in the neoclassical theory. All prices will eventually drop to the marginal cost of a product with near zero profits for the producing company. In a perverse way, this is a “freer” market than ours because it comes closer to the non-rival non-exclusive knowledge base.

In my next blog, I’ll discuss this topic more.