Tag Archives: Economics

The Origin of ‘The World’s Dumbest Idea’

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Writing in Forbes magazine, Steve Denning discusses the origins of what he terms ‘the world’s dumbest idea': Milton Friedman’s notion that the sole purpose of an enterprise is to make money for its shareholders.

The success of the article was not because the arguments were sound or powerful, but rather because people desperately wanted to believe. At the time, private sector firms were starting to feel the first pressures of global competition and executives were looking around for ways to increase their returns. The idea of focusing totally on making money, and forgetting about any concerns for employees, customers or society seemed like a promising avenue worth exploring, regardless of the argumentation.

In fact, the argument was so attractive that, six years later, it was dressed up in fancy mathematics to become one of the most famous and widely cited academic business articles of all time. In 1976, Finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published their paper in the Journal of Financial Economics entitled “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.”

Underneath impenetrable jargon and abstruse mathematics is the reality that whole intellectual edifice of the famous article rests on the same false assumption as Professor Friedman’s article, namely, that an organization is a legal fiction which doesn’t exist and that the organization’s money is owned by the stockholders.

Even better for executives, the article proposed that, to ensure that the firms would focus solely on making money for the shareholders, firms should turn the executives into major shareholders, by affording them generous compensation in the form of stock. In this way, the alleged tendency of executives to feather their own nests would be mobilized in the interests of the shareholders.

The Origin of ‘The World’s Dumbest Idea': Milton Friedman   [Forbes]

Money as Debt

Very interesting and enlightening documentary by Paul Grignon, on the nature and value of money in the modern world and what that means for all of us. Very worth watching.

The Network that Runs the World

A group of complex systems theorists at the Swiss Federal Institute of Technology in Zurich have empirically identified a small core group of trans-national corporations which wield disproportionate power in the international market:

AS PROTESTS against financial power sweep the world this week, science may have confirmed the protesters’ worst fears. An analysis of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.

The study’s assumptions have attracted some criticism, but complex systems analysts contacted by New Scientist say it is a unique effort to untangle control in the global economy. Pushing the analysis further, they say, could help to identify ways of making global capitalism more stable.

In terms of numbers, they found that:

From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 TNCs and the share ownerships linking them. Then they constructed a model of which companies controlled others through shareholding networks, coupled with each company’s operating revenues, to map the structure of economic power.

The work, to be published in PLoS One, revealed a core of 1318 companies with interlocking ownerships (see image). Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What’s more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world’s large blue chip and manufacturing firms – the “real” economy – representing a further 60 per cent of global revenues.

When the team further untangled the web of ownership, it found much of it tracked back to a “super-entity” of 147 even more tightly knit companies – all of their ownership was held by other members of the super-entity – that controlled 40 per cent of the total wealth in the network. “In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network,” says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

Revealed – The Capitalist Network that Runs the World   [New Scientist]

Inside Job

Winner of the Best Documentary Feature at the last Academy Awards.

The film has received very positive reviews, earning a 98% “fresh” rating on Rotten Tomatoes website, which compiles reviews from multiple critics. One viewer-reporter characterized the film as “rip-snorting [and] indignant [with] support from interviews with Nouriel Roubini, Barney Frank, George Soros, Eliot Spitzer, Charles R. Morris and others. But the most effective presence,” he continues, “may be the trusted voice of all-American actor Matt Damon, who narrates the furious takedown of the financial services and the government. It’s a fairly bold move by the actor.”

It was selected for a special screening at the 2010 Cannes Film Festival. A reviewer writing from Cannes characterized the film as “a complex story told exceedingly well and with a great deal of unalloyed anger. [It] lays out its essential argument, cogently and convincingly, that the 2008 meltdown was avoidable. Less familiar faces, including a brothel madam and a therapist who each catered to Wall Street in the bubble years are also seen, and the movie ends not long after Robert Gnaizda, formerly with the Greenlining Institute, a housing advocacy group, characterizes the Obama administration as ‘a Wall Street government’, a take Mr. Ferguson clearly endorses.”

[via]

A little under a year ago, NPR’s Planey Money bought a toxic asset for $1000. Listeners named her ‘Toxie’. Now, however, Toxie is dead, having met her demise due to loan modifications.

Toxie’s Dead [NPR]

Net Worth of Presidents

The Atlantic gives the net worth of every single American president, one by one:

The fortunes of American presidents are tied to the economy in the eras in which they lived. For the first 75 years after Washington’s election, presidents generally made money on land, crops, and commodity speculation. A president who owned hundreds or thousands of acres could lose most or all of his property after a few years of poor crop yields. Wealthy Americans occasionally lost all of their money through land speculation–leveraging the value of one piece of land to buy additional property. Since there was no reliable national banking system and almost no liquidity in the value of private companies, land was the asset likely to provide the greatest yield, if the property yielded enough to support the costs of operating the farm or plantation.

The Net Worth of the U.S. Presidents: Washington to Obama [The Atlantic]

SuperFreakonomics

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Elisabeth Kolbert tears apart SuperFreakonomics in the New Yorker this week. In the sequel to Freakanomics, authors Steven D. Levitt and Stephen J. Dubner continue their trend of grossly misinterpreting statistics and misprepresenting the truth. They go so far as to suggest some geoengineering fixes for climate change. From the review:

One scheme that Levitt and Dubner endorse features a fleet of fibreglass boats equipped with machines that would increase the cloud cover over the oceans. Another calls for constructing a vast network of tubes for sucking cold water from the depths of the sea to the surface. Far and away their favorite plan involves mimicking volcanoes.

During a major eruption, huge quantities—up to tens of millions of tons—of sulfur dioxide are shot into the atmosphere. Once aloft, the SO2 reacts to form droplets known as sulfate aerosols, which float around for months. These aerosols act like tiny mirrors, reflecting sunlight back into space. The net result is a cooling effect. In the year following the eruption of Mt. Pinatubo, in the Philippines, average global temperatures fell, temporarily, by about one degree Fahrenheit.

“Once you eliminate the moralism and the angst, the task of reversing global warming boils down to a straightforward engineering problem,” Levitt and Dubner write. All we need to do is figure out a way to shoot huge quantities of sulfur dioxide into the stratosphere on our own. This could be done, they say, by sending up an eighteen-mile-long hose: “For anyone who loves cheap and simple solutions, things don’t get much better.”

Neither Levitt, an economist, nor Dubner, a journalist, has any training in climate science—or, for that matter, in science of any kind. It’s their contention that they don’t need it. The whole conceit behind “SuperFreakonomics” and, before that, “Freakonomics,” which sold some four million copies, is that a dispassionate, statistically minded thinker can find patterns and answers in the data that those who are emotionally invested in the material will have missed. (The subtitle of “Freakonomics,” published in 2005, is “A Rogue Economist Explores the Hidden Side of Everything.”) In this way, Levitt and Dubner claim to have solved the mystery of why crime, after soaring in the nineteen-eighties, dropped in the nineteen-nineties. (The explanation, they say, is the legalization of abortion, some eighteen years earlier.) They also have proved—at least to their own satisfaction—that names like Ansley and Philippa will be popular for girls in the coming decade, that reading to your kids doesn’t matter, and that drunks should be encouraged to drive rather than walk.

“SuperFreakonomics” and Climate Change [The New Yorker]

The Ghost Fleet of the Recession

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With the global recession in effect, about 12% of merchant vessels aren’t operating. They simply have nothing to carry and nowhere to carry it. Due to the fact that at any given time the majority of vessels spend their time at sea, these empty vessels need somewhere to go. Enter the Ghost Fleet. Hundreds of these empty bulk carriers, tankers, etc. are anchored off the coast of Singapore with just enough crew to prevent collisions. From the article:

It is so far off the beaten track that nobody ever really comes close, which is why these ships are here. The world’s ship owners and government economists would prefer you not to see this symbol of the depths of the plague still crippling the world’s economies.

So they have been quietly retired to this equatorial backwater, to be maintained only by a handful of bored sailors. The skeleton crews are left alone to fend off the ever-present threats of piracy and collisions in the congested waters as the hulls gather rust and seaweed at what should be their busiest time of year.

Local fisherman Ah Wat, 42, who for more than 20 years has made a living fishing for prawns from his home in Sungai Rengit, says: ‘Before, there was nothing out there – just sea. Then the big ships just suddenly came one day, and every day there are more of them.

‘Some of them stay for a few weeks and then go away. But most of them just stay. You used to look Christmas from here straight over to Indonesia and see nothing but a few passing boats. Now you can no longer see the horizon.’

Revealed: The Ghost Fleet of the Recession [Mail Online]

Purchasing Power

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I guess this one doesn’t really need any explanation. But I can’t imagine working two-and-a-half hours for a Big Mac. Wow.

Purchasing Power: An Alternative Big Mac Index [The Economist]