Cafe Hayek's, one of my favorite economic blogs, Russ Roberts has another fantastic piece on how prices of commodities come to be. He explains supply and demand in a 'naked economics' fashion and also has a more rigorous approach for the interested reader. If you don't already have Cafe Hayek in your reader, I urge you to subscribe.
Thursday, June 07, 2007
Photos and text are courtesy of TIME Magazine.
Italy: The Manzo family of Sicily
Food expenditure for one week: 214.36 Euros or $260.11
Favorite foods: fish, pasta with ragu, hot dogs, frozen fish sticks
Chad: The Aboubakar family of Breidjing Camp
Food expenditure for one week: 685 CFA Francs or $1.23
Favorite foods: soup with fresh sheep meat
There is nothing like a tragedy to put things in perspective is there?
In response to this comment, I submit that the notion of a nation state creates a false sense of identity when the nation is culturally heterogenous like in the case of India. In such a case, national pride even when rigorously taught can easily be dampened or forgotten as regional pride and clannish behaviour takes precedence. Isn't this the case with India too? Actually, I think its a feature of all countries with a heterogenous cultural fabric. It is this proclivity to regionalism (states, county, village, tribe) and its attendant suspiscion and insecurity that impedes progress as it impedes cooperation, trade and exchange of ideas. This also causes one clan, tribe, region to progress at the expense of another thus contributing to unequal distribution of the fruits of progress. In countries where the cultural fabric is homogenous (most european countries), national pride is highly integrated into their identity as a people and hence comes across more strongly. The lack of petty regionalism sets up societies in which all equality is a basic tenet and all its people have equal access to opportunites (socialist states try to ensure equality of outcome and thus fail). Such societies do not hold back progress and the distribution of the returns of progress are also likely to be on equitable terms.
I apologize yet again for the break in blogging though this one was prompted not by boredom but by a change of coordinates.
For the past two years, home and work has been in one of two small towns in central PA - State College and Bellefonte, now work takes me and home to the metro west area of greater Boston. I was in this area a couple of weeks ago to fix up the various things that are an integral part of mundane life in America and to my chagrin I found myself in a typical strip mall town except that this strip mall extended for about 15 miles along just one long car packed road. This made me think of all the wonderful things that I was leaving behind - the beautiful, serene valley in the Appalachian in which State College is situated, its narrow mountain roads that wind in and out of forests that inspire me to test the traction control on my car every single time, the numerous lakes and creeks along which many a mile I have hiked. But a significant bump in the work department calls for such sacrifices don't they? That is what I have been telling myself.
The experiences - you can even go so far as to call them a culture shock - I've had in Boston have so far left a lot to be desired. Businesses with narrow operating margins fighting to get your business - a delight to the libertarian in me - fight dirty (obviously) and try to entice the customer using questionable tactics. In short, they try to con unsuspecting people into becoming unwilling customers. They are not in the game for building a loyal customer base - if you are a realtor even one transaction (a one year lease) keeps afloat your margins. Also, since real estate is in high demand, its really a realtor market. Time for some anecdotes - a guy with an apartment overlooking a reservoir had an advertisement that touted "stunning views of the reservoir". While taking a look at it, I could not see any water body at all. I only saw trees and made it a point to ask him about it. With a straight face he replied that in the winter the trees lost their leaves and then (voila!!) I would have been presented with "stunning views of the reservoir". Needless to say, I thanked him (yes, these social norms do seem to get in the way) for his time, walked out and thanked myself that for having remembered that particular detail. I realized that this schmuck knew that "stunning views of the reservoir" will catch people's attention and will get him calls. Once actually in the apartment, most people are more interested in the condition of the apartment, the kind of neighbors, amenities etc. Not to mention the realtor's salesmanship usually guides the talk away from troubling questions and increases the odds in his favor. I faced this on more than occasion and even walked out on a deal at the last second. I faced truck loads of inconvenience but at least I had my dignity - there is nothing more humiliating in the world than being stupid and being aware of it.
Massachusetts is a blue state and its stalwart social democrat politicians in the name of helping its people (sounds a lot like the govt. of India doesn't it?) have created socialist infrastructure with all its attendant regulatory structures. Auto insurance - their terms, their rates - is so heavily regulated that there is absolutely no competition amongst themselves and one is no better than the other. The overhead of complying with all this regulation drives out all but the big players. Companies like Geico, Progressive etc have all been driven out just because regulatory overheads hurt their bottom line so much so that it does not make any business sense to continue their operations. So, there isn't any real choice for customers - one company is as bad as the other. Since there is no competition amongst the companies, there is no incentive for them to innovate and provide greater benefits at lower costs to customers. The regulatory compliance costs are all passed onto the customer in the end. So, who is hurt? The customer obviously. But that is not what the intention was it? There is another downside to all this - the damping effect - all customers get fleeced to pretty much the same degree as the differences in their driving skills as reflected by their driving records (the assumption here being that their record is a direct indication of their skill) is not reflected in their premiums. This causes them to drive with a certain flair that motorists from other states find very shocking. I am sure everyone has heard of the infamous bostonian driver. The streets are less safe on account of rash drivers who probably were not rash drivers to begin with but turned into one in response to the incentives. Not in line with the intentions of the government eh? What do they say about the best of intentions? - the road to hell is paved with them. Consider for a second that all this regulation disappears outright. What do you think will happen? Driving loosely on the edge is so ingrained in the local populace that if and when they are subjected to standards of rates and terms that everyone else in the country are subjected to, the premiums they will pay will in all probability not be any different from their current ones. So, there is no incentive to improve their driving and become more safe on the roads. I do concede that a part of the population will take the opportunity to drive safer and (hopefully) pay lesser premiums but to most it has already become a way of life and its too much effort to change. A most unfortunate outcome wouldn't you say?
A feature of socialist thinking and planning is that it sets up, through unintended consequences, many a vicious circle. This was reinforced in the way my relocation from State College was planned and executed. Most self respecting companies have relocation packages that work in one of two ways - they either have a cash out policy meaning that they give the new employee a budget to work with and let the employee worry and fret about who to call, how to plan, how to schedule etc etc - to moving families, the effort and work involved can be quite daunting. To be fair to the company, giving full control to the moving employee without a budget provides an incentive to be prodigal. The alternative is to let the company select your mover, schedule your move out, add or modify your moving options with the mover, set up direct billing (service providers directly bill the company for services provided without the customers ever seeing a bill) with hotels, car rentals etc etc. Though on the surface the latter option seems like one that offers peace of mind and one that might make a move less stressful, it is often not the case and the acute reader most likely can already see why. This option sets up a dependency on the contact at the company. Since the finances come directly from the company, all service providers will provide a standard one size fits all service (obviously as defined by someone at the company). Customizable services are highly desirable as the circumstances of each moving family are very different (it is not unreasonable to assume that). The cost of customizing these services is high and involves repeated calls to the company's representative even for the most mundane things - the company turns into a great micro manager even though that was not the intention. Also, since at any given time during the hiring season a great many families are planning their move, the stress on the representative greatly increases as he/she plans out and coordinates the most minute details according to each moving family's preferences. They obviously have little time and patience to deal with each case. This has the obvious consequence that the turn around time for communicating with the representative and receiving confirmations greatly increases causing the cost of changing ones preference or even adapting to changing circumstances extremely difficult. Since the frequency reduces, the bandwidth of each missive has to increase making the workload that much higher. This has the unintended consequence (don't you all just love these by now?) that the whole move just does not proceed to the employee's exact preferences, they tend to compromise and just go with whatever the representative can do for them (which on account of them being so busy, surely is not something that the moving family really cares for). So, in the end the move does not turn out to be this worry free, comfortable move that was the intention before instituting such a relocation scheme. Why so you still ask? Because the people actually moving do not have any freedom in choosing and budgeting their options.
There must be some common ground between a cash out with its attendant work load and stress and direct billed socialist structure with its attendant stress and frustration. How about providing a list of vendors who are all set up to talk to the customers directly thus making customization easy. Direct billing can also be set up with budgetary constraints set sufficiently large so as not to cause most people to shoot over and reducing the exercise to what it was earlier. If the customer's prefered vendor is not amongst the list, then you provide a cash out and let the customer worry about budgeting his move options. I know the idea of one person at the company charged with making up a list of vendors and a list of budgeted services is socialist in itself but I am sure it can be beneficial as long as the customer has all choices and ultimate decision capability.
I am sure there are many ways of fleshing out a middle ground. Interested readers can leave suggestions, flaws etc etc in the comments. Its late, I am tired and need to hit the sack.
Regular programming will commence.