Category Archives: Economics

Markets, money, business, and economic thinking.

Great Writing

Economics, Links

Especially in an age where generating words is cheap, when you come across truly great writing, it really stands out. I want to pull two quotes from The Economist’columnist Charlemagne’s article Luxury goods are Europe’s global tax on vanity.

Flogging luxury goods is one of the few fields of business in which Europe excels (if one excludes the crafting of regulation). In an ironic twist, an egalitarian continent with an ever-declining share of global GDP hosts an industry that thrives on inequality and bombastic money-making. For how many seasons more can this alchemy of aspiration endure?

I mean, gosh, look at every word there. How they flow. The density of concepts and metaphors. Here’s another delicious excerpt.

Luxury houses sell the idea of scarcity, with hordes of publicists explaining that the years-long wait for a Birkin handbag is due to the lack of sufficient artisans to craft these pinnacles of refinement. This is a fairy tale stitched in fine silk. The luxury-goods industry has roughly tripled in size since 2000; its €358bn in annual sales—half a Walmart or Amazon, give or take—betrays how thoroughly mainstream supposed exclusivity has become. Fifty years ago, Louis Vuitton had but two outlets, both in France. These days it has two stores in Ningbo, China’s 34th-biggest city. Exclusive, moi?

I guess this post also serves as an endorsement of why it’s worth subscribing to publications like The Economist.

Account for Externalities

Economics, Open Source, Tech, WordPress

When I studied economics, one of the concepts that struck me the most was the concept of externalities. This International Monetary Fund post explains it well. In short, externalities are costs or benefits of an economic activity that affect third parties who did not choose to incur them, leading to a divergence between private and social costs or benefits. They’re spillover effects—positive or negative—that the market price fails to reflect. A classic example is air pollution from a factory, where nearby residents bear health and environmental costs not included in the price of the factory’s products.

Open source is full of externalities. On the positive side, adoption creates ecosystems of developers and provides many paths of distribution. On the negative side, there’s often underinvestment in the very projects that sustain the ecosystem. I have a lot of empathy for why, when open source meets finance and private equity, things can go sideways. You can look at a business built on open source and see seemingly amazing margins—efficient R&D that compounds in a DCF model. A percent here or there over many years really adds up.

My plea to investors in open-source businesses is this: when a business is built on top of open source, incorporate a restorative investment percentage back into the projects critical to the end-user experience of what you’re offering customers. In WordPress, we call this Five for the Future, but it doesn’t have to be five percent; it could be 0.1%. Plan for it when modeling your expected IRR hurdle from an investment. Then, a few years down the line, when the small percentages start to add up, you won’t face a big catch-up or gap.

This underinvestment is itself an externality. It doesn’t appear on the balance sheet, but it can manifest in black swan events, such as security breaches or remote code exploits. Technical debt is one of the largest unaccounted-for externalities in the world today. Engineering, in the long run, is primarily a craft of maintenance rather than creation. The bulk of the cost of something comes from its upkeep over time.

The company Bayer is famous for inventing aspirin in 1898, which is arguably one of the world’s most beloved brands, and for good reason. But I was surprised to learn that just two weeks earlier, the same three guys who gave the world aspirin also created Bayer’s other big brand, heroin, which was marketed for about eight years as the world’s best cough medicine.

From Andrew Essex on his book about the End of Advertising. Hat tip: John Maeda.

The economic uncertainty surrounding basic income is huge, and the politics of bringing such a program about on a large scale are daunting. But something makes this radical proposal so exciting that people and governments are increasingly willing to try it. Basic income challenges our notions of the social safety net, the relationship between work and income, and how to adapt to technological change. That makes it one of the most audacious social policy experiments in modern history. It could fail disastrously, or it could change everything for the better.

From FiveThirtyEight, What Would Happen If We Just Gave People Money?

One of my favorite movies is Thank You for Smoking, the Jason Reitman’s film that looks at the world through the lens of a tobacco lobbyist. It’s fiction, though. This real-life Rolling Stone look at what is going on with rooftop solar in Florida and the big utilities has quotes that could have easily been in the movie.

Facing an amendment that would open up one of the sunniest states to solar power, the utilities created a competing amendment called “Rights of Electricity Consumers Regarding Solar Energy Choice,” which, as you might imagine, is extraordinarily unfriendly to anyone who wants solar panels on their home. Why the confusing title?

Bascom insisted there was no intention to mislead. “It would defy all logic,” she tells Rolling Stone. “Why would we confuse ours with one that does not have public support?”

 

And remember the $5 billion website, 5 billion we spent on a website, and to this day it doesn’t work. A $5 billion dollar website.I have so many websites. I have them all over the place. I hire people, they do a website. It costs me $3.

We were just talking about government websites! The transcript of Donald Trump’s 2016 presidential announcement is one of the more interesting things I’ve read in a while. “And I promise I will never be in a bicycle race. That I can tell you.” In the spirit of alway saying something positive, I do agree that La Guardia airport is a hot mess.

I think one challenge a lot of the business schools have is they end up attracting students who are very extroverted and have very low conviction, and they put them in this hot house environment for a few years — at the end of which, a large number of people go into whatever was the last trendy thing to do. They’ve done studies at Harvard Business School where they’ve found that the largest cohort always went into the wrong field. So in 1989, they all went to work for Michael Milken, a year or two before he went to jail. They were never interested in Silicon Valley except for 1999, 2000. The last decade their interest was housing and private equity.

This entire interview with Peter Thiel is pretty interesting.

I believe the mini-bubbles above are different ripples in what might call the surface of a superbubble: an opulence bubble. Here’s what I mean by opulence bubble: our conception of the good life, as I’ve discussed with you, has been centered on what I call hedonic opulence — having more, bigger, faster, cheaper, now. But we might be finding out, the hard way, that the pursuit of lowest-common-denominator industrial age stuff might have been steeply overvalued, in terms of its social, human, and financial value.

The Opulence Bubble by Umair Haque. Hat tip: Tim Bray and Paul Kedrosky.

Killing Silicon Valley

Economics

Washington Is Killing Silicon Valley, an editorial from the Wall Street Journal. The main thing the article misses is that while the economics of startups are currently distorted doing a startup is still one of the best ways to change the world, for your work to have an impact far beyond the walls of a single company. I’ve seen some killer startups recently, my only hope is that they have enough runway to make it to the execution of their idea. Entrepreneurship.gov says “Freedom is just another word for entrepreneurship.”