FringeBenefits

Nelson Should Have Learnt From the Econ101 Mistakes Made by Clinton

Both McCain and Clinton in recent times embraced a ‘gas tax holiday’ to bolster support for thier campaigns. It was all about the politics of giving “hard working families a break” and nothing to do with good economics. Now it seems, in response to Rudd’s apparantly mediocre first budget, Nelson has also promised a 5 cent a litre cut in petrol excise.

Now the basic problem many economists had with Clinton’s and McCain’s gas tax holiday was that consumers face a straight vertical gas supply curve in the United States. Refineries, at least in the USA, are at near full capacity and such a case cutting taxes only shifts a vertical supply curve downwards, meaning no real change in petrol prices. As Krugman explains by proxy here, the demand for petrol being relatively inelsatic (i.e. consumers feel they have to purchase a certain amount of fuel regardless of its price) means that Nelson’s plan could potentially just hand over $1.8bn a year in government excise revenue to oil companies. I am sure this is the round about figure of the paltry sum that is to be invested over the next 5 years to fight climate change….

Certainly, the petrolium industry is a complex one and I have not done the research to find out whether Australian supply of that nice smelling stuff that powers my expensive journey to uni everyday is fixed or not. I can not imagine that Australian refineries would be running under capacity given their limited capabilities in the first place. And,even if they are, Australia is still not immuned from global supply side restrictions.

I don’t now if this is naeivity, really good political tact, or maybe the fact that Rudd recruited all the best economists who had already not fled Aussie in pursuit of lucrative offshore careers before Nelson. Whatever it is, the opposition’s response to this so called mediocre budget is knee-jerk and less than mediocre, which is ironic given that good ‘economic management’ has become such a buzz word on both sides of camp.

Information Asymetry and The Sports Supplement Industry

The body building supplements retail market seems to be a classic case of information asymmetry in action. The pricing structures and complex “discounts” offered by retailers for a variety of products whose purpose is not far from mystical only gets in the way of consumers being able to compare the price and quality of body building products between retailers.

Here is an example, MuscleTech’s NaNo Vapour. From MuscleTech’s website, NaNo vapour is:

Biomedically engineered with exclusive Nano-Diffuse™ technology, a precise portion of the key compounds in the naNO Vapor formula are reduced to a super-microscopic size that is up to 7400% smaller than the compounds found in regular pre-workout products. This advanced technology is designed to dramatically enhance compound absorption, giving the nanoparticulated particles the ability to easily enter your body, triggering rapid gains in muscle size and strength.

NanoVapur apparently works through a system which includes the following  Power Ranager-esque processes: NeuroAMPs, Infernogen, Vasoprime, Anaphex, Intravol and MgoGF.

What the fuck does the above quasi science mean?! NaNo Vapor is nothing but an overpriced powder of nice artificial flavors, lots of caffeine, red bull stuff, arginine and some amino acids.


The active ingredient in NaNo Vapour is l-arginine, an amino acid that dialtes your blood vessels allowing for greater muscular blood flow (i am not an expert on this). Now I think that L-Arginine has a legitimate and useful place in the gym, but its role and its effective use has been undermined by the quasi scientific crap that floats around in bodybuilding retail stores.

The lack of real information available to consumers of these products means that retailers and manufacturers are able to charge whatever they want and sell lots of CRAP. Retailers enjoy a monopoly over their markets because the cost for consumers to seek out reliable information on what these supplements is just way too high (academic journals are probably the only reliable source I think). What is worse is that those who really want to use supplements properly and train properly are left bewildered - proper nutrition becomes even more of a hassle because of the vast amount of confusing information out there.

The Arbitrary Nature of Social Class

Tanveer Ahmed, the day before Australia Day in the Sydney Morning Herald points out that international students from Asian countries form one of the most “vulnerable groups in society”.

These students, from countries with which I myself identify with in terms of nationality (at least partially) are copping it tough. Unless thier parents are super rich back home, these students would have had to take out loans either back home or here to pay through their tuition and living expenses. Faced with close to deplorable living conditions and high levels of stress and social isolation, they almost form an underclass in the Australian people landscape.  Clearly, these guys do not receive the same level of social opportunities that local students such as myself get.

But what separates me from ‘them’? This is the insight that Ahmed came up with. For Ahmed “there was the difficult decision by my parents decades ago to board a plane and start a new life in an unknown land. And that made all the difference”. And that’s it, a seemingly arbitrary act of parents to migrate to Australia 20 years ago has put Ahmed and arguably myself in completely different social classes as compared to international students from the subcontinent.

I take for granted the availability of HECS, a place to live near university, and an Australian accent and mannerisms that make me not have to work at 7 Eleven. The worst of my financial worries revolves the amount of protein I take to make sure my biceps grow at an adequate rate and how much money I’ll have saved up for my trip to Thailand - not the fact that money lenders are knocking on my parents doors 10,000 miles away.

Andrew Charlton, in his book, ‘Ozonomics’ mentions how a predominantly working class population in Australia quickly became gentrified through land ownership in a resource rich country behind high tariff walls and restricted immigration. The manner in which the middle class baby boomers of Australia were handed their wealth in the form of equity on property bought before the housing boom seems to be completely arbitary. 

Is what separates me from the upper echelons of Australian society only the timing of when my parents bought property in this country?

What struck me was that in these two examples, classs differences are formed not by human agency or choice (social mobility was not a goal in and of itself for my parents when they migrated here), not by genetic endowment, not even by the social class your family or ancestors may have enjoyed. Sure, in the broader scheme of things these other factors play a role but arbitary events seem contribute significantly to social stratification. And these events can be unrelated to the actual implications the resultant social structures have on society. 

Class has a real impact on the intellectual, monetary, political and social opportunities that individuals are presented with. Subsequently this shapes the manner in which individuals contribute back to society through their vocations. Yet class seems to be formed atleast partially independently of the ambitions, desires, values or any genetic predisposition (if there is such a thing) of groups of people.

This is inefficient because this way of allotting class doesn’t allocate opportunity to those who need it or would put that opportunity to best use. On the other hand, the arbitrary nature of social groups does mean that class is a fairly temporary phenomenon, raising the possibility of greater social mobility…..

Growth is Key to Sustainable Future

It is accepted in contemporary debate that capitalist development is the culprit behind environmental degradation and climate change. Sustainable development has come to mean a level of downsizing to pre-modern modes of production as the polemical affluenza virus cripples our lifestyle and the ecosystem.

However, the assumption that modern capitalist society is too affluent is dangerous. Modern capitalism is poor. The cure to climate change and a more sustainable future needs to come from more growth, more affluence, not de-development.

A simplistic yet useful glance at Maslow’s hierarchy of needs shows that people first satisfy their basic material needs for food, shelter, physical security and health after which they satiate so called higher needs. Higher needs include creative freedom, justice, opportunities for political expression and even environmental goods. Environmental goods can include clean air, clean drinking water, a sustainable relationship with our ecosystem and certainty of our own and our children’s economic future – kind of like taking out insurance against adverse environmental effects to our own material security.  

A hierarchy of needs approach suggests that consumers do not view goods that satisfy higher needs and goods that satisfy more basic needs as substitutes. In other words, if consumers place a value on environmental goods they would not sacrifice consumption of these goods for the opportunity to consume more other lower consumables such as plasma TVs. This point of view can be asserted from historical experience, where progress on environmental conservation has been born out of relative affluence, prosperity and greater satisfaction of basic needs.

 Early 19^th Century London, with a GDP per capita less than one tenth of present day United Kingdom was characterised by the unbearable stench of human effluence and rampant air pollution from the smut and stint of coal firing. Even Sydney Harbour was dirtier at that time than it is now.  In North America, that era saw the unapologetic decimation of natural resources and forests with an attitude of environmental ‘conquest’ (http://www.greenwood.com/catalog/GR3201.aspx).

At that time, though capitalism was in its infancy, production methods were highly inefficient compared to today and the understanding of our relationship with the ecosystem was archaic.  

The latter part of 19^th century saw a new level of environmental awareness in the west coming from growing prosperity and a concern for resource preservation. The rise of conservation movements was in part spurred by a burgeoning middle class who had the time, political will and resources to satiate their higher needs with environmental goods. It was during this time that the first national parks were established, The Sierra Club, the forerunner for the Wilderness Society was founded and the state began to play an important regulatory role in managing natural resources.

The conservation movements of the 1890s did not survive the turn of the century. Instead they developed in a wave like manner, peaking at the end of the great economic expansions in the 1920s, 1950s, and arguably, today. These movements pushing for a more sustainable relationship with nature were not underwritten by a desire to somehow slow down economic growth or downsize, but rather to ensure its survival and to improve human standard of living.  

Nobel prize winning economist, Amartya Sen convincingly argues that development or indeed economic growth has at its primary end the very higher needs mentioned above, namely political freedoms, social opportunities and transparency in public life. Sen’s analysis can be expanded to incorporate environmental sustainability as an end to development itself. If consumers derive utility from the consumption of environmental goods then this demands a radical alteration to the way we perceive ideas of material wealth and growth.    

As Australia’s income grows, the methodology of calculating GDP figures needs to be revised to incorporate higher goods that are now demanded by consumers. Current methods of calculating income only explain standards of living up to a certain level of income after which they become redundant. If air pollution decreases our standard of living, pollution should be deducted from GDP estimates, if reduced risk of catastrophic natural disasters creates a more favourable and certain business outlook, then efforts to decrease the likelihood of adverse climate change should add to GDP. Such a revaluation of income measurements would suggest that a transition to a sustainable future presents us with more opportunities for growth rather a threat to our standard of living.  

Policy that does not emphasise the growth opportunities of a more sustainable future and only concentrates on emission reduction is dangerous. The proliferation of the term ‘emission targets’ related to international climate agreements in the press sends out a pessimistic and alarmist message that bad times are coming. The public may react unfavourably to the realisation that more and greater costs will fall on them as a result of treaties which promise emission cuts. This could mean limited domestic support for such international climate treaties in the first place, only reducing their effectiveness. 

Growth based climate politics should focus on informing the public of the benefits of a sustainable future. This would allow more risk taking by consumers and business, facilitating a Schumpeterian creative destruction process leading to the creation of new growth sectors. Government policy and regulation should set the right incentives and regulation for business to meet growing demand for environmental goods. This means greater investment into new energy sources, sustainable technology and the skills and expertise required to undertake the massive urban planning of sustainable cities. New industries will thrive on these initiatives, creating more opportunity for growth and offcourse jobs, increasing our standard of living and wealth.  

Growth based solutions to climate change also present an opportunity to bridge the North – South divide in global multilateral discussions. Large developing economies such as China and India stand to win from tackling climate change early on by investing now in renewable energy and sustainable industries. For Australia, these nations are a market for technology and consulting on infrastructure development, not just the coal, uranium and iron ore of our old economy.  

Economic growth is not only compatible with efforts to deal with climate change but is a precursor to a more sustainable future. Perhaps future economic historians would look on this era as a time of relative poverty, not affluence from the point of view of their new economies.   

Thank God the Libs are Dickheads

Much of the period before the election campaign, I had trouble differentiating between Labor and Liberal party policies and values. Every time a “leftie” friend criticised the so called “right” (Devine, Sheridan etc), I scoffed, mocking the sort of trench warfare that both sides of politics mimic - over no substance. I just said – “surely intelligent people on both sides of politics can see through the crap and understand common human values”. But in hindsight, this idea was worrying….

Two weeks ago, both parties officially started their election campaigns. It took me a visit and wait at the Doctors’ surgery to actually sit down and pay attention to any of these ads. I was shocked to see that both parties have actually carved themselves out distinct political “brands”, social conservatism, growth and individual economic liberties on one side and climate change, education and progressive social values on the other. The Liberal party campaigns made me angry..maybe, I am not a Liberal after all or maybe, god forbid, I am a leftie!

As a wise friend said, political campaigning (at least in this election) is not about winning everyone’s vote. It is about appealing to the psyche of a particular group of people. And thank god for that, if each party aimed for universal appeal, it would be tantamount to ridding plurality from politics. We would end up with some sort of absolutist dictatorship. Thank god for conflict, thank god that there is trench warfare, partisan politics and apparently no consensus on universal human values.  

The Role of Brands in Breaking down Information Asymmetries

One of the very first essays I wrote in University was on why consumer sovereignty, the bedrock of the marketing profession, was a myth. The argument went some like this: consumer sovereignty is a myth because there is no way that consumers form tastes independently of advertising, which becoming more and more pervasive in social institutions which ought to be outside the market such as sport, facebook etc. Off course, writing this for a Political Economy subject earned this essay good marks. Expenditure on advertising was labelled as “wasteful” at best and at worse, was something that ought to be deducted from GDP figures along with resource depletion, expenditure to clean up waste and the big monster - income generated from speculative financial activity.

Years later, however, I am wondering if there is something to good marketing in helping break down a problem of free markets that is often pointed out by critics of free market economic models - information asymmetry…

By definition “Marketing creates value for customers, organisations and society by matching what organisations produce with what customers wan”. In theory marketing is not about “selling”, influencing or dictating tastes, marketing is about ensuring the wheels of the free market are oiled.

Information asymmetry, by definition is unequal knowledge of particular characteristics of the subject of an economic transaction between two parties.

Consider that in a market of hair gel, one firm manufactures Crap hair gel and the other firm manufactures Awesome hair gel. The guy at the salon can’t tell the difference between crap hair gel and awesome hair gel due to information asymmetry - i.e. he does not have an intimate knowledge of the stuff he is buying and the firms do. So instead of paying more for the awesome hair gel and paying less for the crap hair gel, he just pays an average price for both.

Now in this situation, there is no incentive for the producers of Awesome hairgel to invest more in product development to make their product even more awesome because consumers can’t tell the difference between awesome and crap. Accordingly, they won’t pay a higher price for awesome products and hence the awesome firm may not be able to cover its basic costs. If the cost of producing Awesome hair gel is higher than the average price the consumer is willing to pay for product he doesn’t know is crap or awesome, then the awesome hair gel is effectively driven out of the market - everyone just produces crap products and there is no innovation in the market.

An effective brand here can break down this information asymmetry by communicating to the buyer that this product is actually awesome hair gel, not crap hair gel. The buyer has a gut feeling that a particular product is better than an another and is willing to pay more for that product. This leads to product innovation, value for consumers, new technologies, and the usual goodies that come with consumerism.

Now off course, the cynic will say that the fact that a brand is based on a gut feeling means that it involves forming and shapes consumer tastes. If good branding was just about brainwashing consumers, then everyone would be able to do the brain washing. Crap Hair Gel and Awesome Hair Gel would both brainwash the consumer into having a favorable gut feeling about their product. In this case we return to square one, the consumer can’t differentiate between the two products and there is no incentive for Awesome Hair Gel to be awesome.

However, in the case where a brand is based on the internal capabilities of a firm or the properties of a product, the brand can’t be imitated by competitors. And this is the key to effective branding, identify market gaps and figure out where our own capabilities and resources best fit into the market - i.e. don’t try to be something you are not.

Neat little argument eh? Very elegant! The extent to which is holds in reality would depend on how much good brands are really based internal firm capabilities and values and the quality of the product. If in the long run, producers of crap products can continue to brand themselves as good products through clever campaigns and PR without damaging their reputation then this whole argument becomes redundant. So we make an about turn - consumer sovereignty, branding works if consumers in the long run able to form tastes independently of advertising and sus out the crap from awesome!