Thursday, January 26, 2012

Australia Day, columns and externalities

I woke early this morning with a very bad cold and a fogged head. It's raining, and there are again floods in South East Queensland and Northern New South Wales.

I wonder where summer went this year? Our pool is clear and would be inviting if only it were warm.

Today is Australia Day. The hash tag #australianfacts started running early. The thread began with a suggestion by kedgie: "We should so troll the rest of the world with stereotypes about Australia tomorrow with #australianfacts." 

A few random examples for you:

  • The drop bear was introduced into Australia as a measure to stop the rampant pest The Cane Toad
  • Australian schools begin at 9am and close at 3pm to prevent children from walking to school during koala feeding times
  • Australian Rules Football was invented as a way for ladies of the CWA to exchange scone recipes by semaphor
  • When Australians feel they are about to vomit, they reach for a Murray-Darling basin
  • Phar Lap was actually a shetland pony from New Zealand
  • slip slop slap is the national child raising policy
  • the first draft of Advance Australia Fair read "Our land abounds in nature strips"

Today is also India Day. Last year we went to a lunch at an Indian friend's house that kind of combined them both.

Over at his place, our Indian blogging friend Ramana has been fulminating against Indian corruption. This cartoon comes from one of his posts.  I did laugh. 

In Queensland, Premier Anna Bligh has announced a state election for 24 March. On all indications, the Labor Government is likely to be heavily defeated, continuing the Party's national decline. This election has a number of interesting features, so I will do a round-up at some point for the benefit of international readers.

  In my last post, I referred to Winton Bates'  review of Robert Frank's new book. Now Winton has followed up with a second post, Should wasteful competition for positional goods be taken into account in tax policy?

I recognise that some of this can be pretty eye-glazing stuff for a non-economist. In any event, my thinking triggered by Winton's first post has been continuing in a different direction.

I wrote in my last post:

I found this (a quote from Winton) a useful point in clarifying my own thinking, the sometimes confusion I feel between my support for market forces as the best way of achieving results and the negative results flowing from relativist competition. This is aIMG_0005nother aspect linked to the continuing pernicious influence of Social Darwinism.

In an apparent digression, my first column has now appeared in  Australian Business Solutions Magazine.  It's quite pretty!

The column is on the impact of the ratings agencies. I will re-run it in another blog, for our Indonesian blogging friend Niar kindly wanted to actually read it!

The challenge I face in writing on the economy for a business audience is similar to the one I face in extending my response to Winton: how do I simplify so that my ideas are clear to a non-specialist?

This is especially difficult when my own thinking is just so clouded.

I see the negative aspects of the things that I am talking about every day.

I see it in the real reductions of choice in our supermarkets. I see it in real declines in public service efficiency. I see it in businesses that fail to meet customer needs to the point that very survival is threatened. I see it in the collapse of once great brands. I see it in once great universities that have become little more than degree shops. I see it in the ever increasing instability of our institutions. And I see it in the ever increasing burden of regulation as Governments seek to address what are in fact symptoms through direct controls.

If I had to crystallise my concern in a single sentence, I would say that we have substituted the idea of competition as the best way of meeting customer need for the idea of competition as the device for determining relative winners and losers whether at individual or institutional level.

We have also taken the concept of markets as a device for matching buyers and sellers and turned it into an overarching idea that markets are universally good.

In terms of the conceptual underpinnings to the the thoughts that I have, we start with the presence of externalities, something Winton has referred to.

In simple terms, an externality is a cost or benefit that occurs beyond, is not reflected in, an individual transaction or activity. Then we add to that the presence of multiple markets that interact and can conflict.

A firm survives because it meets market need for its particular good or services regardless of externalities. A CEO competes in a different marketplace, again regardless of externalities. 

The broad amounts a CEO is paid is determined by the market for CEOs. This sets a boundary. The actual amount a CEO is paid depends in part on performance. 

But what happens if there is a conflict between the firm and CEO market needs?  Here we need to introduce time.

The life expectancy of a CEO is actually quite short, whereas the life expectancy of the firm is much longer. Actions required to maximise the CEO return may not coincide with the needs of the firm. After all, in the long term we are all dead! 

At this stage I must pause. I will continue these thoughts in a later post.  

Maybe its time to look for an Orbitz coupon and get away.


Winton Bates said...

Jim, in something I have read recently (possibly Frank's book) the point is made that there has been a major shift in corporate culture in the last few decades with firms being much more willing to hire outside CEOs.
Why is it so? After all, a CEO recruited from inside the firm is likely to know much more about the firm, have greater loyalty and be less expensive to hire than an outsider. I think the answer to the question might shed light on the issue you are trying to grapple with.

Evan said...

I think Ross Gittins is a good model for how to write on economics.

Looking forward to more posts.

Winton Bates said...

Yes Evan, Ross certainly writes well!

Jim Belshaw said...

Good morning Winton and Evan. I agree that Ross writes well.

You raise an interesting point, Winton. I have a rough mud map in my mind as to when and why that change took place. It's part of the broader changes that came to a head during the eighties with their focus on market models.

Winton Bates said...

Jim, my impression is that outside CEOs are hired because they have no ties to people within the firm and no pet projects to look after. Boards had the impression - correct in many instances - that culture within their firms was serving the interests of the staff rather than owners.

Jim Belshaw said...

That's true, Winton. But did it actually work?

Winton Bates said...

It worked in some firms and not in than others. Is it possible to predict when the strategy is least likely to work?

Jim Belshaw said...

I suspect that it is, Winton, although I am still thinking this through. I am presently writing a post on the tent embassy imbroglio, but will pick this issue up tomorrow.

Rummuser said...

Thanks for the mention Jim. I hope that you caught that description of me in

“Ramana is opinionated about politics, sentimental about family, and pragmatic about the direction his life has taken.”


Jim Belshaw said...

I did Ramana!

Rummuser said...

Doesn't the description ring a bell?

Jim Belshaw said...

Yes, Ramana, it could apply to me as well!

Winton Bates said...

Jim, I have followed up Evan's comment with a review of Ross Gittin's latest book on my blog.