I was handed an interesting link by bloggerazzi about a part of economics that I had never heard about till date, called Transaction Cost Economics.
previously, the inefficiencies of a manufacturing system were found on the assembly line. So, if a production line slows down, or if extra material is machined, then you know where to pin the blame on! Catch the worker on the line, and improve the process!
But that only worked to an extent, and todays economies are now somewhat different. How, you might ask?
Firstly, todays production lines are not solely dependent upon the worker. They also depend on the supervisor, the inventory scheduler, the middle manager, the stores guy, the accounts man, and half a dozen lawyers to boot.
Basically, a transaction where the only trade is in intellect and services is subject to several unique features. First, is of course, how do you bill the transaction. Second, and linked to one, is measuring the effectiveness of the transaction.
For example, if you were performing a machining operation on a lathe, you could work out to the nearest penny how much it costs to produce a component. Right from the power consumed, and the cost of the interest on the loan for the lathe, to the wages the underpaid lathe man gets paid, everything is accountable.
But how do you rate the effectiveness of a manager? Or judge the utility of a lawyer? Most of the time, they seem useless...but trust me, when you are hit with a lawsuit, you will wish you had a good lawyer (And good accountants too).
Transaction Cost economics tries to quantify these things and come up with numbers that denote their worth. But at the same time, some interesting points come up! Firstly, we see that as an operation becomes more complex, there are more transactions needed to complete the job perfectly.
From this we come to the old one about the factors of production. We all know 3 factors of production. They are
1. Land
2. Labour
3. Capital
But there is a fourth factor which comes up, and transaction costs best defines the fourth factor of production, which is, Management.
In short, Management can be defined as the factor by which the transaction costs that determine the other three factors can be reduced. I do hope that last sentence made sense, because it is the crux of the next point.
Management is also about handling information efficiently. And today one of the points that has been made is that management requires information instantaneously. This has been the reason why IT investments have frequently been justified. They are supposed to reduce the transaction costs made due to lack of information. But IT investment adds another transaction layer to the entire system, and must justify itself. Also, it is seen that the amount of information gathered creates yet more transactions in information processing. This is one of the reasons why IT implementation frequently is seen as a failure. The initial gains that are promised are all used up in the implementation of the IT system itself.
So, one of the things that anyone interested in designing IT solutions should be doing is to map the transactions that take place in any process. Then, identify the transactions that can be reduced or eliminated. Third, quantify the costs that will be saved by reducing these steps. The last process is the one that is truly difficult. And that is to anticipate the additional transactions that will ensue from bringing your IT system into place.
One of the reasons why designing an IT system is not the same as simply automating the process. And why IT consultants earn their fat pay packets too!
Monday, July 30, 2007
Monday, July 23, 2007
Privacy and security
There are literally thousands of emails and articles written which talk about email security, and how you should not reveal data about yourself online, such as your birthday, or the colour of your eyes. Why? Because, if you do, people can steal your identity, and then steal all your money from some bank.
The first time I saw these emails/articles, I agreed wholeheartedly. Of course it is right that we should protect these details from malicious hackers. And then I realized exactly what it was that I was protecting. After all, I like presents, so I widely publicize my birthday to one and all anyway. And anyone who wants to steal my identity is surely going to have enough initiative to see my photo to check the colour of my eyes. There are enough of those lying around in the world!
What it seems to me is that the companies which are being affected by identity theft are trying to pass the buck here. Why on earth do they not have better security systems. After all, its easier for them to blame the poor customer than it is to make sure that problems don't crop up in the future.
So, I am going to be a lot more suspicious when someone asks me to hide my birthday on my orkut profile.
The first time I saw these emails/articles, I agreed wholeheartedly. Of course it is right that we should protect these details from malicious hackers. And then I realized exactly what it was that I was protecting. After all, I like presents, so I widely publicize my birthday to one and all anyway. And anyone who wants to steal my identity is surely going to have enough initiative to see my photo to check the colour of my eyes. There are enough of those lying around in the world!
What it seems to me is that the companies which are being affected by identity theft are trying to pass the buck here. Why on earth do they not have better security systems. After all, its easier for them to blame the poor customer than it is to make sure that problems don't crop up in the future.
So, I am going to be a lot more suspicious when someone asks me to hide my birthday on my orkut profile.
Thursday, July 19, 2007
Of overcharging Taxi Drivers, and all of their ilk -- Sub optimal Economic Equilibrium
Yesternight, a friend of mine was attempting to hail a taxi at Salt Lake in Kolkata. Of course, no taxi guy seemed to be willing to take him for anything under 10 times the actual price, so he had to walk in the end.
But this got me thinking. According to definitions, perfect competition would exist when it is very easy for people to enter and exit the market. By that definition, taxi drivers in Salt lake should exist in perfect competition. But clearly, because prices have not fallen, it seems as if there is no perfect competition here. Why is that so?
Now, at first I thought it could be cabals or unions that distort the free market...but that did not make enough sense. So here is an alternative explanation for why taxi and auto guys charge so much...even though due to competition they ought to offer cut rate prices.
Let us take a hypothetical case where there are 1o taxi drivers. In most places, such as Bangalore, or bombay, there would be a plethora of customers, and the taxi driver would have choices, as does the customer. Also, because most of the customers are locals, knowledge of the locale is also assumed. In this case, it seems to me that the perfect competition model ensures that the lowest prices will be guaranteed.
However, in a place like Salt Lake and Gurgaon, the case would be slightly different. Firstly, the local populance is unlikely to travel by taxi. In salt lake, this is probably due to familiarity, and lack of places to go to. In the case of gurgaon, it is because those who live there are likely to have their own private means of transport like a car or a bike. Therefore, the only people who are likely to hail a taxi-cab are going to be people who are not locals. Also this subset is definitely smaller than the superset of all the people living in the area.
So to summarise, problem is
1. Information Asymnetry
2. Finite customer base.
So, let us take a hypothetical case of 10 taxi drivers, and only 2 customers. While it seems counterintuitive that the prices should go up, here is why they will. In order for the taxi driver to make ends meet, he will have to get revenues of say Rs. 200 a week. Whether he gets it by taking 1 fellow 5 times or taking him once is immaterial to him. Therefore, now these 2 customers will now pay 400 between them. Now, while only 2 taxi drivers benefit, averages say that the next day, another 2 taxi drivers will get 200 and the first 2 will go without clients at all. So, all in all, in a 5 day week, all the taxi drivers will get paid, and the total income would be Rs. 2000. (200 a week per taxi driver)
What would happen now if 1 guy undercuts to a more realistic fare...say Rs. 30. Remember, this is a price inelastic market, so the number of customers won't really go up. So he might get 2 more passengers added to the market. Now, by perfect competition laws, every other taxi driver should also lower his prices down to 30. So now, the total revenue made by all the taxi drivers now is 4x30x5= Rs. 600. This means that every taxi driver now gets only Rs. 60 in a 5 day week.
So we have a perfectly logical explanation for why taxi guys overcharge in certain places. Its market demand a and supply based, after all!
But there is a neat little corollary here. This is in reality a vicious cycle, because the assumption that is made for this to work is that the demand is inelastic with respect to price. This assumption was made with respect to mobile phones when they first came to India. The rates were incredible, with prices going as high as Rs. 27 per minute. Obviously there were not many takers for that sort of price. But once TRAI mandated changes to pricing, companies were busy complaining that they were going to make huge losses. But to their surprise...they did not...the market got them new customers....and that began the price war that led to perfect competition (practically).
The analogy of course with autos and taxis is this....someday, someone will cut the price and address a market of locals as well...then the traditional elastic demand and supply economics will triumph!
But till then, if you live in Salt Lake or Chennai...prepare to get fleeced by the local private transport providers!
But this got me thinking. According to definitions, perfect competition would exist when it is very easy for people to enter and exit the market. By that definition, taxi drivers in Salt lake should exist in perfect competition. But clearly, because prices have not fallen, it seems as if there is no perfect competition here. Why is that so?
Now, at first I thought it could be cabals or unions that distort the free market...but that did not make enough sense. So here is an alternative explanation for why taxi and auto guys charge so much...even though due to competition they ought to offer cut rate prices.
Let us take a hypothetical case where there are 1o taxi drivers. In most places, such as Bangalore, or bombay, there would be a plethora of customers, and the taxi driver would have choices, as does the customer. Also, because most of the customers are locals, knowledge of the locale is also assumed. In this case, it seems to me that the perfect competition model ensures that the lowest prices will be guaranteed.
However, in a place like Salt Lake and Gurgaon, the case would be slightly different. Firstly, the local populance is unlikely to travel by taxi. In salt lake, this is probably due to familiarity, and lack of places to go to. In the case of gurgaon, it is because those who live there are likely to have their own private means of transport like a car or a bike. Therefore, the only people who are likely to hail a taxi-cab are going to be people who are not locals. Also this subset is definitely smaller than the superset of all the people living in the area.
So to summarise, problem is
1. Information Asymnetry
2. Finite customer base.
So, let us take a hypothetical case of 10 taxi drivers, and only 2 customers. While it seems counterintuitive that the prices should go up, here is why they will. In order for the taxi driver to make ends meet, he will have to get revenues of say Rs. 200 a week. Whether he gets it by taking 1 fellow 5 times or taking him once is immaterial to him. Therefore, now these 2 customers will now pay 400 between them. Now, while only 2 taxi drivers benefit, averages say that the next day, another 2 taxi drivers will get 200 and the first 2 will go without clients at all. So, all in all, in a 5 day week, all the taxi drivers will get paid, and the total income would be Rs. 2000. (200 a week per taxi driver)
What would happen now if 1 guy undercuts to a more realistic fare...say Rs. 30. Remember, this is a price inelastic market, so the number of customers won't really go up. So he might get 2 more passengers added to the market. Now, by perfect competition laws, every other taxi driver should also lower his prices down to 30. So now, the total revenue made by all the taxi drivers now is 4x30x5= Rs. 600. This means that every taxi driver now gets only Rs. 60 in a 5 day week.
So we have a perfectly logical explanation for why taxi guys overcharge in certain places. Its market demand a and supply based, after all!
But there is a neat little corollary here. This is in reality a vicious cycle, because the assumption that is made for this to work is that the demand is inelastic with respect to price. This assumption was made with respect to mobile phones when they first came to India. The rates were incredible, with prices going as high as Rs. 27 per minute. Obviously there were not many takers for that sort of price. But once TRAI mandated changes to pricing, companies were busy complaining that they were going to make huge losses. But to their surprise...they did not...the market got them new customers....and that began the price war that led to perfect competition (practically).
The analogy of course with autos and taxis is this....someday, someone will cut the price and address a market of locals as well...then the traditional elastic demand and supply economics will triumph!
But till then, if you live in Salt Lake or Chennai...prepare to get fleeced by the local private transport providers!
Tuesday, July 10, 2007
Biofuels-- Agrofuels. Whats in a name?
Today, I thought I would enter the biofuels debate. After all, every Tom, Dick and Harry wants to enter the debate. So why not Balasubramanian?
Biofuels are the common name given to anything that provides energy that comes from agricultural sources. This could be ethanol, power produced from bagasse, jatropha seed juice, even methane from cowdung.
So why is everyone interested in it now though? After all, these things have been around since the dawn of time, practically. Heck, I remember watching programs on biogas when I was a kid, and Doordarshan was the only Channel available!
Well, the answer is simple. 10 years ago, a barrel of crude oil used to cost $12-14. Today, it is about $76. Economics says that if prices go up, demand for the product goes down. But Oil is a strange commodity. Like food, the modern world cant seem to live without it. Thus, a situation in economics called inelastic demand sets in, where demand is somewhat independent of price. But even though the demand stays constant, now there is a desire for substitute sources. And this is where biofuels comes in.
Burning Ethanol in the car engine has been around since Gerald Ford made the first Model T. After all, it was a car designed to run on alcohol. But who would like to go through the lengthy process of growing a crop, and then waiting for it to grow, and finally produce alcohol fuel, when you get high grade petroleum oil practically coming out of the ground for free! So alcohol was abandoned. But when oil hit $50 a barrel, the interest was rekindled. After all, the cost of sugarcane is not too much, and alcohol could now be substituted. And besides, after all the hoopla about green energy and global warming, producers can get labelled as good guys even while they rake in the money!
But can there ever be a perfect deal? Unfortunately no! What you gain on the swings, you lose on the roundabouts. Ethanol is produced from three major crops; sugarcane, corn and sugar beet. But sugarcane requires fertile and irrigated land. And even if we take the entire cropland in the world and grow sugarcane on it, we probably would not be making enough ethanol to supply our needs. At best, ethanol is a partial substitute. Also, the diversion of land from food crops to sugarcane leads to a situation where food prices will become a serious problem. This is especially because the crop is grown in countries which are not precisely rich; Brazil, India, Africa, and the likes.
So the lobby against biofuels is slowly building itself up. But this is a debate that will probably be decided by the Financial officers and the bean counters at an office rather than in the streets and farms. But the end result may well be seen in the economics classrooms when people discuss case studies on substitute products!
Biofuels are the common name given to anything that provides energy that comes from agricultural sources. This could be ethanol, power produced from bagasse, jatropha seed juice, even methane from cowdung.
So why is everyone interested in it now though? After all, these things have been around since the dawn of time, practically. Heck, I remember watching programs on biogas when I was a kid, and Doordarshan was the only Channel available!
Well, the answer is simple. 10 years ago, a barrel of crude oil used to cost $12-14. Today, it is about $76. Economics says that if prices go up, demand for the product goes down. But Oil is a strange commodity. Like food, the modern world cant seem to live without it. Thus, a situation in economics called inelastic demand sets in, where demand is somewhat independent of price. But even though the demand stays constant, now there is a desire for substitute sources. And this is where biofuels comes in.
Burning Ethanol in the car engine has been around since Gerald Ford made the first Model T. After all, it was a car designed to run on alcohol. But who would like to go through the lengthy process of growing a crop, and then waiting for it to grow, and finally produce alcohol fuel, when you get high grade petroleum oil practically coming out of the ground for free! So alcohol was abandoned. But when oil hit $50 a barrel, the interest was rekindled. After all, the cost of sugarcane is not too much, and alcohol could now be substituted. And besides, after all the hoopla about green energy and global warming, producers can get labelled as good guys even while they rake in the money!
But can there ever be a perfect deal? Unfortunately no! What you gain on the swings, you lose on the roundabouts. Ethanol is produced from three major crops; sugarcane, corn and sugar beet. But sugarcane requires fertile and irrigated land. And even if we take the entire cropland in the world and grow sugarcane on it, we probably would not be making enough ethanol to supply our needs. At best, ethanol is a partial substitute. Also, the diversion of land from food crops to sugarcane leads to a situation where food prices will become a serious problem. This is especially because the crop is grown in countries which are not precisely rich; Brazil, India, Africa, and the likes.
So the lobby against biofuels is slowly building itself up. But this is a debate that will probably be decided by the Financial officers and the bean counters at an office rather than in the streets and farms. But the end result may well be seen in the economics classrooms when people discuss case studies on substitute products!
Friday, July 06, 2007
Strategic HR--That elusive creature
Human Resource in every company is much vilified. It is claimed (sometimes justifiably) that they are useful only for 3 things, recruitment, payroll, and vilification.
But todays HR professionals feel that they are being short changed. In the party where the marketing guys ruled, and the finance guys were feted, the poor HR fellows looked a little bit out of place, standing at one corner, dipping into the drinks cabinet now and then.
Times had to change, and suddenly a divine light dawned....and the enlightened HR professional came up with the golden words, and it was called "Strategic HR".
HR guys suffered from quite an inferiority complex. Whenever a fin guy was asked to deliver his results, he could say, hey i lowered your debts by 90%, and saved you a tonne of cash. And marketing, "Heck, where would you be without your star who got you 50 new clients?". But poor HR..."Sir, I hired 2500 new employees who are going to cost you Rs100 crores....and most of them will leave by next week." Not guaranteed to bring a smile to that CEO's face.
Strategic HR tried to turn things on its head. It said, "Phsaw...these balance sheets are all past data. and all those sales happened yesterday. Our stock prices depend on tomorrow...and for that, we need future growth."
And of course, future growth was measured by whether you had the right people doing the right job, at the right time, at the right place. This was strategic HR's idea. To pick the best people for the best job at the right time. And all this would be based upon a company's nebulous vision and mission statement.
Today's HR profs and executives are big believers in Strategic HR. Whether it works is still a matter of conjecture.
Mind you, I do not denigrate HR. Any company with Bad HR is doomed to devastation and ruin. But I am just a little bit suspicious about Strategic HR. Its fine in theory. But in practice, it frequently means work...which no one likes doing.
But todays HR professionals feel that they are being short changed. In the party where the marketing guys ruled, and the finance guys were feted, the poor HR fellows looked a little bit out of place, standing at one corner, dipping into the drinks cabinet now and then.
Times had to change, and suddenly a divine light dawned....and the enlightened HR professional came up with the golden words, and it was called "Strategic HR".
HR guys suffered from quite an inferiority complex. Whenever a fin guy was asked to deliver his results, he could say, hey i lowered your debts by 90%, and saved you a tonne of cash. And marketing, "Heck, where would you be without your star who got you 50 new clients?". But poor HR..."Sir, I hired 2500 new employees who are going to cost you Rs100 crores....and most of them will leave by next week." Not guaranteed to bring a smile to that CEO's face.
Strategic HR tried to turn things on its head. It said, "Phsaw...these balance sheets are all past data. and all those sales happened yesterday. Our stock prices depend on tomorrow...and for that, we need future growth."
And of course, future growth was measured by whether you had the right people doing the right job, at the right time, at the right place. This was strategic HR's idea. To pick the best people for the best job at the right time. And all this would be based upon a company's nebulous vision and mission statement.
Today's HR profs and executives are big believers in Strategic HR. Whether it works is still a matter of conjecture.
Mind you, I do not denigrate HR. Any company with Bad HR is doomed to devastation and ruin. But I am just a little bit suspicious about Strategic HR. Its fine in theory. But in practice, it frequently means work...which no one likes doing.
Wednesday, July 04, 2007
Exchange Rate, the value of money, and China's reserves
The previous post, which i flagrantly copied and pasted was so good that I thought I would expand on it a bit.
From that article, the conclusion was drawn that money of one country is of no real use in another country...somehow it must come back to its parent country in order to regain its value.
That is, if you took an Indian rupee and tried spending it in china, they would laugh at you. and if some dratted chinese guy came to my shop and tried waving remnebi in front of me, I would probably kick him out of my store. (obviously chivalry dictates that I would not kick a Her out of the store).
The article also did a spectacular job of explaining what exports actually mean. It means that you get hold of foreign currancy....but cant really use it, unless you spend it in that persons currency. Now, spending is of two kinds. One is usual, that is consumption spending. This is not valued too much by economists (can't imagine why). The other is investment spending, when you invest in another country.
But what happens if you do not really want to do either? Let us take China as the example. They get a lot of American dollars from the US for their goods. Do they buy American cars in return? Not a chance! They would much rather buy better quality Japanese stuff. How about investing in American companies then? I can almost hear a hypothetical Chinese investor snickering away here! Why invest in Fords and Enrons, when you have a Chinese stock market that is barreling its way upward like a bull that just saw true love?
So the Chinese government has to hold on to American dollars, because nobody wants to really spend it. What does that do to the value of the Chinese currency though. Now you have a situation where people are paying good American Dollars for Chinese goods, and the dollars are not really getting back to America. I am not quite certain how the next logical step works, but one of the things that happens is that the Chinese Currency now starts to become more valuable. After all, you might buy your chinese toys in walmart in american dollars, but the chap who owns it now needs remnebi, which nobody can give him, because nobody is willing to buy American dollars and sell remnebi. Thus the Remnebi becomes a stronger currency. At least that is the theory.
However, because the Chinese Government does not want to make their currency stronger, they decided to keep it at a fixed rate....and what does that mean. It means that the laws of demand and supply are being distorted....and there is always a cost to it. In order to keep the Remnebi weak, the Chinese government now has to keep buying dollars and selling remnebi, even though the value of the dollar is not so good anymore.
So there you have it: Why China has foreign currency reserves of $1 trillion dollars.
From that article, the conclusion was drawn that money of one country is of no real use in another country...somehow it must come back to its parent country in order to regain its value.
That is, if you took an Indian rupee and tried spending it in china, they would laugh at you. and if some dratted chinese guy came to my shop and tried waving remnebi in front of me, I would probably kick him out of my store. (obviously chivalry dictates that I would not kick a Her out of the store).
The article also did a spectacular job of explaining what exports actually mean. It means that you get hold of foreign currancy....but cant really use it, unless you spend it in that persons currency. Now, spending is of two kinds. One is usual, that is consumption spending. This is not valued too much by economists (can't imagine why). The other is investment spending, when you invest in another country.
But what happens if you do not really want to do either? Let us take China as the example. They get a lot of American dollars from the US for their goods. Do they buy American cars in return? Not a chance! They would much rather buy better quality Japanese stuff. How about investing in American companies then? I can almost hear a hypothetical Chinese investor snickering away here! Why invest in Fords and Enrons, when you have a Chinese stock market that is barreling its way upward like a bull that just saw true love?
So the Chinese government has to hold on to American dollars, because nobody wants to really spend it. What does that do to the value of the Chinese currency though. Now you have a situation where people are paying good American Dollars for Chinese goods, and the dollars are not really getting back to America. I am not quite certain how the next logical step works, but one of the things that happens is that the Chinese Currency now starts to become more valuable. After all, you might buy your chinese toys in walmart in american dollars, but the chap who owns it now needs remnebi, which nobody can give him, because nobody is willing to buy American dollars and sell remnebi. Thus the Remnebi becomes a stronger currency. At least that is the theory.
However, because the Chinese Government does not want to make their currency stronger, they decided to keep it at a fixed rate....and what does that mean. It means that the laws of demand and supply are being distorted....and there is always a cost to it. In order to keep the Remnebi weak, the Chinese government now has to keep buying dollars and selling remnebi, even though the value of the dollar is not so good anymore.
So there you have it: Why China has foreign currency reserves of $1 trillion dollars.
Tuesday, July 03, 2007
Alan Johnston is Free
Freed at last....and I wonder if he will ever go back to report on Palestine again. But at least he came out alive!
The following is from a blogger named Ronald Brak. If you wish to read his actual post, please go to his webpage....I have taken this verbatim from there, so do read him here. He is quite simply great!
When I was in Melbourne last week and riding in one of those electric conveyances they call a train, I saw a sign painted on the side of a factory building that said, “Buy your kids a job: Buy Australian.”
I wonder how this would work? If everybody in Australia only bought Australian products then everyone who produces exports would be out of a job. This is because you can’t export without importing and if everyone only buys Australian no one will buy imported goods. Unless of course the people who want us to buy Australian expect the export industries to just give away their production to other countries for free? My, if that’s the case, how generous they are with other people’s money. But it might be a bit hard to convince those workers it’s a good idea. “I’m sorry, but as Australia no longer imports anything and this mine only produces coal for export it’s not possible to actually receive payment for it anymore, so the wages of all you miners will have to be reduced to zero. In addition, since there is no income to purchase fuel we will soon be reduced to digging coal by hand. On the bright side, the Japanese will be very grateful. Now stop standing around and get to work!” No wonder so many people support weaker unions.
If buying overseas products is so bad it’s a wonder we didn’t ban it ages ago. In fact Australia made strong moves in that direction during the great depression. This was so successful that Australia soon became an economic powerhouse and entered the period known as the roaring thirties. Any stories you’ve heard about hardship at this time, or indeed swagmen, are lies spread by the black armband type of historian.
I have heard people say, “It’s better for the money to stay in Australia!” But I wonder why that is? Does the money get scared when it leaves its home country? If it were better for the money to stay in Australia, wouldn’t it be even better if the money stayed in its own state? Or perhaps even its own town? Wouldn’t it be best of all if the money never left the pocket of the person who owned it? Just think how rich we’d all be if no one ever bought anything!
But Australian money always comes back to Australia. It has to. It’s like magic. Let’s say some filthy foreigners, in an attempt to hurt Australia’s economy, take a heap of Australian notes and burn them while dancing and gloating around the rather stinky bonfire. Well, all that money value would return to Australia, as the treasury would print up a new batch of notes as soon as it noticed there weren’t enough in circulation, magically creating money out of nothing!
Okay, you say, so filthy foreigners burning or eating Australian notes won’t result in money not coming back to Australia, but surely buying filthy foreign products made by filthy foreigners, or even clean ones, must be bad?
No. Not at all. To explain, let’s say you want to buy a toilet brush. To keep things simple will assume that all transactions are in cash and that there are no banks or other institutions that exchange money.
Let’s say that down at the shop you have a choice between two toilet brushes of equal quality. An expensive one made in Australia and a cheap one made in China. Now you might think that if you bought the more expensive Australian one, you’d be helping an Australian company. Well you’d be right, but you’d also be hurting an Australian, yourself. It costs you money to buy the more expensive product. If that’s what you want to do, fine, go for it. But it might be more efficient to buy cheaper foreign goods and then just give the money you save to Australian companies as a gift.
But what happens if you buy the cheaper Chinese toilet brush? Won’t the money go out of the country? Well, yeah, it’ll go to China. But it won’t stay there. Somewhere in China there will be some toilet brush factory owner with a stack of Australian money. What’s he going to do with it? Australian dollars aren’t much use to him. He can’t go down to the corner store and buy a bowl of noodles with them. He needs Chinese currency for that. All his employees expect to be paid in Chinese money too and so do the suppliers he buys plastic stock and bristles from. Unless he wants to go on vacation in Australia and spend it himself he’ll have to swap it for Chinese money.
But who in China would want Australian money? What good is it in China? Well it is useful for buying things from Australia. For example, the local meat distributor might be interested in buying some Australian beef. The power company might want some Australian coal. The noodle factory might want Australian wheat. All our toilet brush businessman has to do is call up these companies and find out which one will give him the best deal on Chinese currency in return for his Australian dollars and then the Australian dollars will return to their home country as they are used to pay for Australian products. Hey presto, no money leaves the country for long.
Using checks or electronic money transfers don’t change this situation at all. Nor do the existence of banks that act as middlemen for exchanging money. So buying goods from overseas isn’t somehow bad for the economy.
But wait a minute! What about Australian companies that are going to the wall because of overseas competition? If the Australian toilet brush company goes out of business won’t Australian workers lose their jobs? Shouldn’t we help the owners of these companies? Well no, we shouldn’t. We should help the workers, not the owners. If the owners want they can receive the same training/relocation/government work program that their former employees get. You see, business owners have a very important job and that is to make good business decisions. If we protect them from the results of bad business decisions, such as producing toilet brushes in Australia, then they haven’t got such a strong incentive to do their job well.
To repeat, this is not my post. All intellectual rights to it belong to Ronald Brak, found here!
When I was in Melbourne last week and riding in one of those electric conveyances they call a train, I saw a sign painted on the side of a factory building that said, “Buy your kids a job: Buy Australian.”
I wonder how this would work? If everybody in Australia only bought Australian products then everyone who produces exports would be out of a job. This is because you can’t export without importing and if everyone only buys Australian no one will buy imported goods. Unless of course the people who want us to buy Australian expect the export industries to just give away their production to other countries for free? My, if that’s the case, how generous they are with other people’s money. But it might be a bit hard to convince those workers it’s a good idea. “I’m sorry, but as Australia no longer imports anything and this mine only produces coal for export it’s not possible to actually receive payment for it anymore, so the wages of all you miners will have to be reduced to zero. In addition, since there is no income to purchase fuel we will soon be reduced to digging coal by hand. On the bright side, the Japanese will be very grateful. Now stop standing around and get to work!” No wonder so many people support weaker unions.
If buying overseas products is so bad it’s a wonder we didn’t ban it ages ago. In fact Australia made strong moves in that direction during the great depression. This was so successful that Australia soon became an economic powerhouse and entered the period known as the roaring thirties. Any stories you’ve heard about hardship at this time, or indeed swagmen, are lies spread by the black armband type of historian.
I have heard people say, “It’s better for the money to stay in Australia!” But I wonder why that is? Does the money get scared when it leaves its home country? If it were better for the money to stay in Australia, wouldn’t it be even better if the money stayed in its own state? Or perhaps even its own town? Wouldn’t it be best of all if the money never left the pocket of the person who owned it? Just think how rich we’d all be if no one ever bought anything!
But Australian money always comes back to Australia. It has to. It’s like magic. Let’s say some filthy foreigners, in an attempt to hurt Australia’s economy, take a heap of Australian notes and burn them while dancing and gloating around the rather stinky bonfire. Well, all that money value would return to Australia, as the treasury would print up a new batch of notes as soon as it noticed there weren’t enough in circulation, magically creating money out of nothing!
Okay, you say, so filthy foreigners burning or eating Australian notes won’t result in money not coming back to Australia, but surely buying filthy foreign products made by filthy foreigners, or even clean ones, must be bad?
No. Not at all. To explain, let’s say you want to buy a toilet brush. To keep things simple will assume that all transactions are in cash and that there are no banks or other institutions that exchange money.
Let’s say that down at the shop you have a choice between two toilet brushes of equal quality. An expensive one made in Australia and a cheap one made in China. Now you might think that if you bought the more expensive Australian one, you’d be helping an Australian company. Well you’d be right, but you’d also be hurting an Australian, yourself. It costs you money to buy the more expensive product. If that’s what you want to do, fine, go for it. But it might be more efficient to buy cheaper foreign goods and then just give the money you save to Australian companies as a gift.
But what happens if you buy the cheaper Chinese toilet brush? Won’t the money go out of the country? Well, yeah, it’ll go to China. But it won’t stay there. Somewhere in China there will be some toilet brush factory owner with a stack of Australian money. What’s he going to do with it? Australian dollars aren’t much use to him. He can’t go down to the corner store and buy a bowl of noodles with them. He needs Chinese currency for that. All his employees expect to be paid in Chinese money too and so do the suppliers he buys plastic stock and bristles from. Unless he wants to go on vacation in Australia and spend it himself he’ll have to swap it for Chinese money.
But who in China would want Australian money? What good is it in China? Well it is useful for buying things from Australia. For example, the local meat distributor might be interested in buying some Australian beef. The power company might want some Australian coal. The noodle factory might want Australian wheat. All our toilet brush businessman has to do is call up these companies and find out which one will give him the best deal on Chinese currency in return for his Australian dollars and then the Australian dollars will return to their home country as they are used to pay for Australian products. Hey presto, no money leaves the country for long.
Using checks or electronic money transfers don’t change this situation at all. Nor do the existence of banks that act as middlemen for exchanging money. So buying goods from overseas isn’t somehow bad for the economy.
But wait a minute! What about Australian companies that are going to the wall because of overseas competition? If the Australian toilet brush company goes out of business won’t Australian workers lose their jobs? Shouldn’t we help the owners of these companies? Well no, we shouldn’t. We should help the workers, not the owners. If the owners want they can receive the same training/relocation/government work program that their former employees get. You see, business owners have a very important job and that is to make good business decisions. If we protect them from the results of bad business decisions, such as producing toilet brushes in Australia, then they haven’t got such a strong incentive to do their job well.
To repeat, this is not my post. All intellectual rights to it belong to Ronald Brak, found here!
Subscribe to:
Posts (Atom)
