Nature of the firm

A fundamental change over the 20th century, paraphrased from a Paul Graham article:

In the early 20th century, big companies were synonymous with efficiency, as compared to delivering a product using a network of cooperating companies.

Today computers enable far easier coordination, reducing the transaction costs that Coase argued are the raison d’etre of corporations.

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When the wind blows

I looked today at investing into a company setting up a small wind turbine. I’ll keep the numbers round for confidentiality reasons.

£700k start-up costs, with a 75% chance in any year of generating enough energy to sell at 5p / kwhr to the grid for £30k.

10% of revenues go to the site’s landlord, and a flat £15k per year to the manufacturer for a full maintenance contract.

This is clearly not viable. Fortunately there is an additional subsidy of 18p / kwhr (rising annually) due to the Government’s Feed-in-Tariff.

Nothing about this site will get cheaper over time. Assuming a life span of 25 yrs and a 10% discount rate, the turbine and other start-up costs would have to drop from £700k to £100k for future such ventures to start to look interesting sans subsidy.

In the UK the total subsidies needed for all such schemes are added up, and then divided out amongst all consumers’ bills, so it’s not clear to the general public just how much more expensive (it appears 4x as much) some alternative energy sources are costing.

Future Governments change their minds about policies. And for that reason, I’m out.

Being poor in a rich country

The FT has an article today with ‘the one chart that explains the world’.

Global income distribution by ventile

 

The vertical axis refers to the distribution of global incomes. The horizontal axis segments citizens of different countries by 20 income groups. As you can see, even the poorest people in Germany are very much richer than those in the Ivory Coast, for example. The person compiling the data, Prof Milanovic, finds that about half of one’s income depends on the average income of the country in which that person was born.

It reminds me of a post on global income distribution I made previously, basically that the poorest 5% of Americans earn more than the richest 5% of Indians. Source .

India led the world in GDP before the industrial revolution, when population meant productivity, and India had the largest population. Following the industrial revolution, India entered a long period of economic stagnation. India used to account for 33% of the world’s GDP, then fell to 3%. Source.

 

 

God save the queen

THE best thing about being monarch is the huge amount of money you get, the Queen has confirmed.

It is understood the Queen later telephoned the King Juan Carlos of Spain, said ’38 million’ and then hung up on him.

More here.

Except, it’s not only £38m, but more like £150m a year according to Republic (which is the source for the rest of this post).

They don’t work much for it either:

the Windsors are very good at working three days a week, five months of a year and making it look as though they work hard

And the “mere 67 pence per person per year” value-for-money justification that the £38m is often turned into is in fact explicitly stating that rent seeking by a special interest group is going on, the benefits of which are concentrated whilst the costs are spread widely with no rational economic incentive for an individual to spend time objecting.

To test whether something is ‘value-for-money’ we need to judge what we get for our money and whether we can get something better for less. The monarchy fails this test:

  • Of the top 20 tourist attractions in the UK only one royal residence makes it: Windsor Castle at 17 (beaten comfortably by Windsor Legoland, in at number 7). Buckingham palace is normally closed to tourists, and when it does open only a small portion is accessible. If the palace does marginally entice tourists to the UK, then if the Queen were removed and the entirety opened, all year round, there would be a much greater tourist effect.
  • London is a leading financial centre – do the big businesses in the City and Canary Wharf need the help of a little old lady in a big house in central London?

Further or alternatively, the Crown Estate is not and never has been the personal property of the Windsor family. In the 18th century the job of government was moving from the palace to parliament, so revenue from the Crown Estate was transferred to the Treasury. In order to ensure the King could continue to run his palace in the style to which he was accustomed the government of the day set up the Civil List, a payment to the palace by the government. There was no personal sacrifice or transfer of owned assets on the part of the monarch.

Coasting along

I’m following Marginal Revolution University’s new online course on Development Economics.

Efficient transportation networks are a well-recognised  factor contributing to enhanced prosperity by facilitating trade. Africa is missing the river networks one finds across Europe, and moreover, their coastline is actually surprisingly small.

Here’s a map of Africa, (credit: Kai Krause) highlighting just how large the continent is by massaging different countries into it….

As you can see, Europe easily fits into it (along with China, India and the US too!)

However, the coastline of Europe alone is 2 to 3 times longer than that of Africa’s (it’s much ‘bendier’ and depending on how you do the fractals you get somewhere between 2x and 3x the African continent).  That’s a lot more access to transportation by boat.

Transportation by road is a lot better in Europe too. Riffing off a conversation with Simon Moore on a trip we made to Tanzania some years ago, there are different models for funding roads and officials.

In Europe we pay a known road tax (and other taxes) once a year, which cover maintenance, construction, police, etc. Whereas in places in Africa the traffic police are not paid [at a market rate] and instead extract bribes from motorists to make up the difference. This is very inefficient. From an Economist article:

The plan was to carry 1,600 crates of Guinness 500km. It should have taken 20 hours, including an overnight rest. It took four days. We were stopped at road-blocks 47 times.

At some road-blocks, the police went through our papers word by word, in the hope of finding an error. Policemen checked to see whether the truck was carrying a fire extinguisher. Similar scrutiny was lavished on tail-lights, axles, wing-mirrors and tyres, all in the name of road safety. The longest delay came in the town of Mbandjok, where the police decided that Martin did not have enough permits, and offered to sell him another for twice the usual price.

A gaggle of policemen joined the argument, which grew heated. The total number of man-hours wasted, (assuming an average of seven policemen involved, plus three people in the truck), was 35—call it one French working week. And all for a requested bribe of 8,000 CFA francs ($12).

Good things come in small packages

One way companies can try to increase profit margins is to reduce the quantity sold, whilst retaining the same price point – hopefully without the customer realising. So for example, a cereal manufacturer might reduce the quantity of product sold whilst keeping the same price, and do that by reducing the depth of the carton, not the height or width. The customer remembers the size of the packaging (as presented to them on a shelf), and the price, and doesn’t notice the difference – so the theory goes.

I bought some white truffle salt in California earlier this month, and was amused to notice (after the purchase) that the back of the container was of a smaller dimension than the front. It could just be a design flaw in that particular glass jar, or a sneaky way of reducing the quantity the customer receives…

…Update: turns out it is sneaky, all of the mini glass jars are of the same shape and have the forward facing label on the same side.

Get rich or die tryin’ (to spend it)

My boss pulled up in his brand new BMW today and I couldn’t help but admire it.

“Nice car,” I said as he got out.

“Well,” he said, noticing my admiring looks, “Work hard, put the hours in, and I’ll have an even better one next year.”

Paraphrasing from a good article by Paul Graham:

Someone graduating from college thinks, and is told, that he needs to get a job. A more direct way to put it: you need to start doing something people want. You don’t need to join a company to do that but for many people the best plan probably is to go to work for some existing company. This means doing something people want, averaged together with everyone else in that company.

However, is that averaging disadvantageous for you? In a big company you get paid a fairly predictable salary for working fairly predictable hours. You can’t go to your boss and say, I’d like to start working ten times as hard, so will you please pay me ten times as much? For one thing, the official fiction is that you are already working as hard as you can.

Economically, you can think of a startup/working independently as a way to compress your whole working life into a few years. Instead of working at a low intensity for forty years, you work as hard as you possibly can for four.

You could probably work twice as many hours as a corporate employee, and if you focus you can probably get three times as much done in an hour. You should get another multiple of two, at least, by eliminating the drag of the middle manager who would be your boss in a big company. Then there is one more multiple: how much smarter are you than your job description expects you to be? Suppose another multiple of three.  If a fairly good hacker is worth $80,000 a year at a big company, then a smart hacker working very hard without any corporate bullshit to slow him down should be able to do work worth about $3 million a year.

Like all back-of-the-envelope calculations, this one has a lot of wiggle room. I wouldn’t try to defend the actual numbers. But I stand by the structure of the calculation. I’m not claiming the multiplier is precisely 36, but it is certainly more than 10.

And once you have all that money, then paraphrasing from an article at messymatters.com on savings:

The risk of dying with too much money should be taken just as seriously as the risk of dying poor. After all, that excess money in old age represents forgone opportunities earlier in life.

Spend money on anything that shifts your focus from the mundane to things that give your life meaning. Donating to charities that are meaningful to you is a great way to do that. Traveling to visit friends and family should rank highly for the same reason. Improving the world, having fun adventures, relationships with friends and family, satisfying intellectual curiosity…

Certain kinds of adventures you may not be physically capable of at retirement age. And don’t forget the possibility that you’ll die young. Or there could be a financial collapse that sparks hyperinflation, destroying your hard-earned savings. Or there could be technological explosions that change everyone’s level of wealth.

Have a bias for enjoying things now; it’s worth some amount of risk of being poorer than you’d like to be in retirement. Consider the strategy of throughout your life, taking, say, a month of unpaid leave every time you accumulate several thousand dollars in excess savings. If you keep obsessively saving past a reasonable target then you are, in a very literal sense, wasting money, by letting it sit as excess savings instead of doing something with it that makes your life better.

Improve your life by outsourcing tasks you do not enjoy. For example, don’t do your own taxes or change your own oil or clean your own house if you don’t enjoy those things, especially if you enjoy your job more than those tasks and your effective hourly rate is not much lower than (or is higher than) the hourly cost of the outsourcing.

Also, consider getting your retirement setup in place sometime before you retire.