I recently had an interesting discussion with a diverse group of people about the value of the Space Program announced by Obama Administration earlier this month. Of course, the issue has generated debate in regards to the role of government in the modern society. Here are my thoughts on the subject.
History has proven that free-market environments provide more effective conditions for sustained economic growth. Many refer to the progress of the western societies, and primarily USA, to support this argument. However, since the globalization movement intensified – during the last two decades – the rapid evolution of the emerging economies, even in absence of perfect free market mechanisms, (China being the most relevant example) raise questions in regards to the absolute relevancy of the above hypothesis.
A closer look at how the role of the government is played in prosperous societies will offer an interesting perspective.
Constitutions provide the framework for the fundamental rights and obligations that members of a nation must collectively observe. They purposely leave the role of defining and running the economic space into the hands of elected governments. For most democratic countries this works fine, within the confines of the national borders. But what about the global environment?
There is no constitution universally accepted at the planetary level, nor there is any governing authority generally recognized across the globe. The creation - after the Second World War - of international organizations such as UN (United Nations) was meant to ensure the harmony in the political space. Similarly, portions of the economic spectrum were intended to be regulated by structures like WTO (World Trade Organization) or IMF (International Monetary Fund). We all witness, today, how difficult it is for members of these organizations to reach consensus on any measure of real importance, and how ineffective their involvement is in configuring a healthy and controllable global economic environment.
The consequence is a series of gaps, overlaps, contradictions and confusions - all anomalies that are creating a moral hazard - selfishly exploited by business and political entities in possession of the asymmetric information. This is why banks and other financial institutions prosper in this environment, beyond our wildest imagination. This is their business model: to detect valuation differentials and capitalize on any inbalance of sorts by creating exchange markets where these transactions take place, allowing them to benefit in two ways – charging significant transactional fees, or shorting the movement of stocks.
It is hard enough to regulate an internal system; it is close to impossible to impose such regulations on the global scale. Hence, the legitimate question of the worthiness of the type of markets that do not create a social utility, nor respond to a planetary need.
The speculative financial markets should be contained. The current betting system that constitutes the market for derivatives resembles rather a casino setting. It should be a sport in which people engage individually or as a group, but only to the extent of their sole capabilities. It should be treated and tolerated as entertainment, rather than means of existence. To allow such industry to evolve to the point that its failure could destabilize an entire economy it’s not only perverse, but is totally irresponsible.
* * * * *
We all agree that societies are complicated structures, which require a complex mechanism of organization and control. Beside industries that are producing real value through the conception, creation and transformation of goods and services there is an objective need for support and infrastructure, where the majority of peripheral services play an important role. But they have to remain peripheral as opposed to taking the center stage, and substitute the core.
Among the type of government spendings that do not have an immediate pay-back in terms of societal benefits – other than the employment of people in the industry - one could include the space program, production of military equipment or field deployments etc. These are few areas where efforts are of a strategic nature and will only bring long-term benefits. Although the outcomes are positive and generally supported by members of society, the efforts required to achieve meaningful results transcend the ability of the private sector. Incentives have to be created and support provided by governments through subsidies or budgetary allocations. Therefore, budget allowances remain the most effective tools to trigger, stimulate, accelerate or terminate such efforts.
At the other end of the spectrum there are activities that have a natural tendency to proliferate, due to the attractive margins they offer when insufficiently regulated (see financial speculations, drugs and arms dealings, adult entertainment etc.) We all can understand that in a free-society the existence of such activities is a necessary evil (the Romans invented the concept of “bread and circus” as the effective means of keeping people occupied in order to prevent revolts). But they should not be tolerated to the point that they become the most effective way of getting rich.
Ability to accumulate wealth should be correlated directly with the value contribution to the society. And this evaluation – of what is congruent with a nation’s values and aspirations – should be entrusted to a democratically elected government. In fact, the government should create and maintain (sometimes by means of political decisions, and other times by means of public consultation) a classification of activities, organized based on a merit point system, from the least important (but legal) to the most important.
The activities at the left of the spectrum (the least important) should be taxed more aggressively to prevent out of control expansion, the ones in the middle should be tolerated or encouraged through reduced taxes and/or subsidies, while the ones of national importance should benefit of tax exemption and budgetary funding.
It is in this context that I believe that trading derivatives for financial speculation should be placed at the left of the social utility spectrum. I find the whole discussion about bailing out institutions using such techniques for their own benefit as unfounded. When they do well they should be taxed in the highest bracket; when they are on the verge of collapse they should be left to suffer the consequences of their own greed.
On the contrary, the space program should be funded in proportion to the nation’s ability to support it, without sacrificing the normal quality of life of its citizens. In the long run, the cognitive progress and the technological advancements resulting from such programs provide universal benefits that, beyond any doubt, enhance the human condition, thus justifying the investment.
Sunday, April 25, 2010
Saturday, March 20, 2010
Lessons from the Best in the Field
When it comes to finances, investments and a life worth living, nobody seems more qualified to lecture than Warren Buffett. From his biography - “The Snowball”, written by Alice Schroeder – I extracted some words of wisdom which I would like to share with interested readers.
About Stock Market
In the short run the market is a voting machine. In the long run is a weighing machine. Weight counts eventually, but votes count in the short term.
What one is doing when investing is deferring consumption and laying money out now to get more money back at a later time. The only two questions are: How much are you going to get back, and when?
Interest is the cost of “when”. It is to finance what gravity is to physics. As interest rates vary (from period to period, or from country to country) the perceived value of all financial assets – houses, stocks, bonds – changes.
Ultimately, the value of the stock market could only reflect the output of the economy. (Buffett expected the growth to be no better than 7% a year, on average). The wishful thinking that the stock market could keep rising at 10% or more a year, could only happen in three ways:
• If interest rates remain below historic levels for an extended period of time
• If the share of the economy that went to investors (as opposed to being consumed by employees and government) rose above sustainable levels
• The economy would start growing faster than normal.
However, all of the above are abnormal conditions.
About Wall Street
Wall Street is the only place where people ride in a Rolls-Royce to get advice from people who take the subway.
Anybody who consistently beats the market average is just lucky or trading on inside information. Behind every great fortune (achieved through speculation) there is a great crime.
Moral hazard is a chronic disease, but the world will always be full of people who love risk.
When enough time passes and nothing happens, people who are making a lot of money tend to think it is because they are smart, not because they are taking a lot of risk.
Derivatives are like sex; it’s not who we’re sleeping with, it’s who they’re sleeping with that’s the problem.
Wall Street is a “casino society” that is making the corporate raiders rich. The speculator’s profits should be taxed 100%.
If you keep betting long enough, sooner or later, as long as zero is not impossible, someday a zero will be one hundred percent certain to show up.
About Life
The purpose of life is to be loved by as many people as possible, among the ones that matter to you….That’s the ultimate test of how you have lived your life… As you get older and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.
The trouble with love is that you can’t buy it. You can buy sex, you can buy testimonial dinners, you can buy pamphlets that say how wonderful you are. Sometimes, vast amounts of money could make a person look more attractive, funny and intelligent. But the only way to get love is to be lovable. And for the ones who have a lot of money, this truth is especially irritating. You’d think they could write a check: I‘ll buy a million dollars worth of love. But it doesn’t work that way. The more you give love away, the more you get back.
Life is like a snowball; you are born at the top of a hill and you could roll down, growing at every turn. But there are choices in life that will influence the way you grow.
“…The snowball only happens if you are in the right kind of snow. What makes it right is your understanding of the world and what kind of friends you accumulate. At times, you get to select, and you’ve got to be the kind of person that the snow wants to attach itself to. You’ve got to be you own wet snow, in effect. You’d better be picking up snow as you go along, because you’re not going to be getting back up to the top of the hill again. That’s the way life works.”
About Stock Market
In the short run the market is a voting machine. In the long run is a weighing machine. Weight counts eventually, but votes count in the short term.
What one is doing when investing is deferring consumption and laying money out now to get more money back at a later time. The only two questions are: How much are you going to get back, and when?
Interest is the cost of “when”. It is to finance what gravity is to physics. As interest rates vary (from period to period, or from country to country) the perceived value of all financial assets – houses, stocks, bonds – changes.
Ultimately, the value of the stock market could only reflect the output of the economy. (Buffett expected the growth to be no better than 7% a year, on average). The wishful thinking that the stock market could keep rising at 10% or more a year, could only happen in three ways:
• If interest rates remain below historic levels for an extended period of time
• If the share of the economy that went to investors (as opposed to being consumed by employees and government) rose above sustainable levels
• The economy would start growing faster than normal.
However, all of the above are abnormal conditions.
About Wall Street
Wall Street is the only place where people ride in a Rolls-Royce to get advice from people who take the subway.
Anybody who consistently beats the market average is just lucky or trading on inside information. Behind every great fortune (achieved through speculation) there is a great crime.
Moral hazard is a chronic disease, but the world will always be full of people who love risk.
When enough time passes and nothing happens, people who are making a lot of money tend to think it is because they are smart, not because they are taking a lot of risk.
Derivatives are like sex; it’s not who we’re sleeping with, it’s who they’re sleeping with that’s the problem.
Wall Street is a “casino society” that is making the corporate raiders rich. The speculator’s profits should be taxed 100%.
If you keep betting long enough, sooner or later, as long as zero is not impossible, someday a zero will be one hundred percent certain to show up.
About Life
The purpose of life is to be loved by as many people as possible, among the ones that matter to you….That’s the ultimate test of how you have lived your life… As you get older and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.
The trouble with love is that you can’t buy it. You can buy sex, you can buy testimonial dinners, you can buy pamphlets that say how wonderful you are. Sometimes, vast amounts of money could make a person look more attractive, funny and intelligent. But the only way to get love is to be lovable. And for the ones who have a lot of money, this truth is especially irritating. You’d think they could write a check: I‘ll buy a million dollars worth of love. But it doesn’t work that way. The more you give love away, the more you get back.
Life is like a snowball; you are born at the top of a hill and you could roll down, growing at every turn. But there are choices in life that will influence the way you grow.
“…The snowball only happens if you are in the right kind of snow. What makes it right is your understanding of the world and what kind of friends you accumulate. At times, you get to select, and you’ve got to be the kind of person that the snow wants to attach itself to. You’ve got to be you own wet snow, in effect. You’d better be picking up snow as you go along, because you’re not going to be getting back up to the top of the hill again. That’s the way life works.”
Sunday, February 28, 2010
Toyota Conundrum
This is one of the most intriguing stories of the modern industrial era. It is so not just because it involves one of the manufacturing icons of our times, but because its larger than life story of success and exemplary execution has become the closest representation to an ideal business model.
Nothing used to be more convincing about building a supply chain, running efficient operations, employee involvement, customer loyalty and product reliability, than the example of Toyota’s Production System. An entire vocabulary of Japanese terms has been embraced and popularized by a consulting industry fascinated with the attributes of the TPS. Many companies around the world have tried to emulate their style of operation. Everything seemed to evolve in their favor until their own success started to haunt them. Last year Toyota surpassed all the other car manufacturers in global sales. There is little surprise that simultaneously it became the target of public scrutiny and political interest.
Marketing specialists have advised for years that product identity is key in establishing consumer preference. For Toyota that ID tag was reliability. But the differentiation attribute could be also the Achilles heel. When that unique quality starts to fade, the entire foundation of trust is shaken. The recent incidents related to sudden acceleration - reported by drivers of some models - is exactly the type of problem that could ruin Toyota’s untainted reputation.
What caused the unexpected turn of events? At what point did they deviate from the strategy that ensured them success? Where did their new tactics open areas of vulnerability? All of these are questions that, in the last few months, preoccupy the minds of industry experts, political commentators, media and financial analysts as well as the public at large.
One of the memorable aspects of Toyota’s traditional image is the superiority of their technical characteristics and the processes that ensured almost perfect quality and reliability. We might have become accustomed to that image via marketing campaigns or advertizing, but the credibility of its claim was based on technical merits. The people who made that image recognizable were more the likes of engineers and technicians who created designs, processes and systems that resulted into meritorious products, and less the kind of individuals who spread the word through shows, billboards and TV advertizing.
It is relevant to remember that when Toyota developed the strategy of penetrating the North American market, it sent an army of engineers to study the lifestyle of the target audience, and to translate the discoveries into product attributes that are suitable and attractive to the intended users. They returned with intelligent findings, objective observations and the knowledge rooted in the reality of the market they were committed to serve. What resulted was a series of high performance, attractive and reliable models that gradually earned the respect of the North American public and the appreciation of a loyal clientele. Engineers and technicians used to be the heart and soul of the Toyota organization.
More recently, due to competitive pressures, they switched the focus to marketing and sales, and placed their technical foundation on the back burner. There is usually a lag between the change in strategy and the impact in the field. However, when consequences start to surface they have a long-term effect. There is also a fine balance between the amount of funding, energy and effort required in different functional departments of a corporation. It doesn’t take much, though, to push an institution off balance.
It is clear now that Toyota – while claiming more boldly their first place in the minds of the customers through expensive and aggressive marketing campaigns – have taken their eyes off the ball, and subordinated the usual rigorous development, testing and control systems to the temptations of rushing production, and the pressure of being first on the market.
There is a lesson to be learned from each failure. I am sure that the Japanese technicians will eventually restore their good name by resorting to what brought them the initial reputation: solid engineering and decent positioning.
Nothing used to be more convincing about building a supply chain, running efficient operations, employee involvement, customer loyalty and product reliability, than the example of Toyota’s Production System. An entire vocabulary of Japanese terms has been embraced and popularized by a consulting industry fascinated with the attributes of the TPS. Many companies around the world have tried to emulate their style of operation. Everything seemed to evolve in their favor until their own success started to haunt them. Last year Toyota surpassed all the other car manufacturers in global sales. There is little surprise that simultaneously it became the target of public scrutiny and political interest.
Marketing specialists have advised for years that product identity is key in establishing consumer preference. For Toyota that ID tag was reliability. But the differentiation attribute could be also the Achilles heel. When that unique quality starts to fade, the entire foundation of trust is shaken. The recent incidents related to sudden acceleration - reported by drivers of some models - is exactly the type of problem that could ruin Toyota’s untainted reputation.
What caused the unexpected turn of events? At what point did they deviate from the strategy that ensured them success? Where did their new tactics open areas of vulnerability? All of these are questions that, in the last few months, preoccupy the minds of industry experts, political commentators, media and financial analysts as well as the public at large.
One of the memorable aspects of Toyota’s traditional image is the superiority of their technical characteristics and the processes that ensured almost perfect quality and reliability. We might have become accustomed to that image via marketing campaigns or advertizing, but the credibility of its claim was based on technical merits. The people who made that image recognizable were more the likes of engineers and technicians who created designs, processes and systems that resulted into meritorious products, and less the kind of individuals who spread the word through shows, billboards and TV advertizing.
It is relevant to remember that when Toyota developed the strategy of penetrating the North American market, it sent an army of engineers to study the lifestyle of the target audience, and to translate the discoveries into product attributes that are suitable and attractive to the intended users. They returned with intelligent findings, objective observations and the knowledge rooted in the reality of the market they were committed to serve. What resulted was a series of high performance, attractive and reliable models that gradually earned the respect of the North American public and the appreciation of a loyal clientele. Engineers and technicians used to be the heart and soul of the Toyota organization.
More recently, due to competitive pressures, they switched the focus to marketing and sales, and placed their technical foundation on the back burner. There is usually a lag between the change in strategy and the impact in the field. However, when consequences start to surface they have a long-term effect. There is also a fine balance between the amount of funding, energy and effort required in different functional departments of a corporation. It doesn’t take much, though, to push an institution off balance.
It is clear now that Toyota – while claiming more boldly their first place in the minds of the customers through expensive and aggressive marketing campaigns – have taken their eyes off the ball, and subordinated the usual rigorous development, testing and control systems to the temptations of rushing production, and the pressure of being first on the market.
There is a lesson to be learned from each failure. I am sure that the Japanese technicians will eventually restore their good name by resorting to what brought them the initial reputation: solid engineering and decent positioning.
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