Wednesday, September 20, 2006

Vertical integration

Slate licks up on a WSJ look at the return of vertical integration.
The return of vertical integration. By Daniel Gross - Slate Magazine:
"Responding to the recent rise in prices for crucial commodities like copper, rubber, nickel, and oil, manufacturers of all types have taken steps to ensure they have adequate supplies of raw materials and parts. The article cited several examples of companies that bought outright or took stakes in their suppliers. In July, Armor Holdings, which makes armored cars and other products for what it delicately calls the 'survivability industry,' acquired Integrated Textile Systems Inc., which makes a type of fiber used in earmarks products. To ensure a supply of titanium-based parts for its drumlin 787, Boeing last week created a joint venture with Russia's VSPMO-Avisma, the world's largest titanium producer. In 2005, Bridgestone, the Japanese tire maker, purchased a huge Indonesian rubber plantation from Goodyear. "

How does this affect the idea that there are different types of capitalism that operate in different ways? Rhenish capitalism will focus on long-term, incremental innovation that will likely encourage vertical integration; Anglo-Saxon capitalism will be more flexible and more likely to create adaptive structures that are not vertically integrated.

Sunday, September 17, 2006


Neuroeconomics and why primeval emotions suppress reasoning when things are very uncertain.

The New Yorker: Fact:
"The results of the experiment suggested that when people are confronted with ambiguity their emotions can overpower their reasoning, leading them to reject risky propositions. This raises the intriguing possibility that people who are less fearful than others might make better investors, which is precisely what George Loewenstein and four other researchers found when they carried out a series of experiments with a group of patients who had suffered brain damage."

This also appears to provide an insight into "the ultimate game". When a low offer is made, respondent's emotion makes them punish the offender at the expense of their own gain.

Friday, September 15, 2006

FX intervention

How unlimited foreign exchange intervention can become problematic even for an appreciating currency. For the moment Chinese rates are below USD, but this may be the way that China is heading also. Currencies:
"``Lawmakers see the snowballing deficit from the foreign- exchange fund heavily weighing on the government's finances,'' said Oh Jae Kwon, head of the Bank of Korea's currency-market operations team. ``They may ask the national audit board to look into the case.'' Accumulated losses from the management of the fund were 18 trillion won ($19 billion) at end-2005, he said. "

Wednesday, September 13, 2006

The Law of Once Price

Stumbling and Mumbling: Limits of arbitrage:
"The law of one price doesn't apply - at least for cannabis. According to this survey (pdf), cannabis resin costs twice as much in Manchester as in Liverpool. Which raises the question: why isn't there arbitrage? Why don't traders buy blow from Scousers, drive 35 miles, and sell it to Mancs?
I reckon there are four possibilities:"

Tuesday, September 12, 2006

Noise trader risk

Everything is easy to explain and understand in hindsight. However, at the time many people were saying that technology would change the world. They were also looking at the best example of a technology company that they had - Microsoft. There are of course many reasons why Microsoft is successful, but one of them is that it was the first to sell a mass-market operating system. There was (and is if we look at Google, EBay, Apple's Ipod) an argument that says that if you are first into the market, network effects will mean that you can create a monopoly that will generate huge future revenues. At least some of the rapid appreciation of technology companies was the attempt to find these new firms with "first-mover advantage".

In retrospect, there are only a few firms that can prevent others entering the same market. The network effect that makes Microsoft operating system (and even more so) Microsoft Office more valuable the more people use them, does not extend to all products. Just because I sell dog food over the internet, does not mean that others cannot do the same. However, at the time this was less clear than it is now. If it were clear, why weren't all those people who now say that they could see the writing on the wall selling these over-valued shares and pushing the price back towards fair value.

The first answer to this is that it is only clear now in the cold light of day. Many of those who say that they were shouting "stop" were actually shouting "buy". The second answer is that there is a risk that share prices continue to move against you even if you know that they are over-valued. People do not have unlimited finance or confidence to continually bet against the hurd.

The main academic paper on this is

Noise trade risk

On a more practical note -

Tony Dye

Tony Dye was trying to act against the market. His employers lost patience just at the moment that he was being proved right.


Saturday, September 09, 2006

Types of capitalism and types of investment

Undercover Economist: Marriage and convenience:
"JoskowÂ’s explanation surely tells you something about when to be a freelancer - perhaps even when to stop playing the field and get married. Like east coast coal mines, it can be attractive to be footloose and fancy-free - provided you have alternatives and as long as you are not required to make serious investments that are specific to the relationship. My own marriage was swiftly followed by a relationship-specific investment. SheÂ’s nearly two and a half."

Coincidently, Tim Harford talks about different types of investment at a time that I learnt about different types of firm fodifferentnt types of capitalism. Anglo-Saxon capitalist requires flexible firms with non-specific capital (human and physical); social welfare capitalism concentrates on specific capital. The Anglo-Saxon model is flexible and innovative in the product but is not good at developiniterativeve improvements in the production process. There were papers presented at the conference that I attended that suggested that FDI was directed to particular countries according to whether they could bcategoriseded as Angle-Saxon or Welfare state firms.

EMH and the law

The Economist has a good angle on the EMH and how this is one economic theory that is embedded into US law.

"In 1988, in Basic Inc v Levinson, the court endorsed a theory known as “fraud on the market”, which relies on the efficient markets hypothesis. Because market prices reflect all available information, argued the court, misleading statements by a company will affect its share price. Investors rely on the integrity of the price as a guide to fundamental value. Thus, misleading statements defraud purchasers of the firm's shares even if they do not rely directly on those statements, or are not even aware of them"

Wednesday, September 06, 2006


Martin Wolf talks about a paper presented by Tony Venables to the recent Fed conference in Jackson Hole talking about the effects of agglomeration and its influence on development.

"The conclusion of this line of analysis is that production will shift only where the benefits of agglomeration are relatively small or the benefits of moving activities are large. Moving back-office functions is an example of the former. Shifting production of clothing to poorer countries is an example of the latter. But the advantages of established centres of expertise are enduring, provided some effort is put into maintaining them: London has been a world-class financial centre for almost three centuries. The relocation of activity will, suggests Prof Venables, prove both difficult and “lumpy”."

Tuesday, September 05, 2006

Overshooting - in ideas / Comment & analysis / Columnists - The world may regret the end of the neo-con era: "The neo-con experience shows the market in ideas – like the market in shares – has a tendency to over-shoot. The militaristic and unilateralist elements of neo-conservatism clearly need rethinking. Americans also need to think harder about the social and historical underpinnings that make democracies work. The danger is that the backlash against neo-conservatism could lead in the wrong direction – and take America back into isolationism or a cynical abandonment of the promotion of democracy. If that were the case, the rest of the world may end up regretting the demise of neo-conservatism"

Sunday, September 03, 2006

The share of profits and wages in GDP

There has been a huge amount of talk recently about the share of profits and wages in GDP. Many point to the fact that US wages as a share of total income are at the lowest level since.....Even if we take total compensation it appears that capital has gained an increased share.

Brad DeLong and Krugman suggest that the balance of power has shifted against labour and that this is part of the rightward shift in the US.

DeLong comments on inequality

Chris Dillow has a more nuanced view.

Stumbling and Mumbling: Some profits arithmetic

If we look at the share of wages and profits in UK GDP, they are pretty stable. There is a structural shift around 1945, presumably because of the introduction of the welfare state etc. However, if the shares shift too far, I would think that there is a natural mechanism to bring things back into equilibrium. At the moment, US consumer spending is relatively high compared to compensation. This will correct - either spending will fall or wages will rise.