Archive for March, 2011

Sankt Gallen and Saentis in the back

Rosenberg tree

Vernal art

Traditional Swiss farm

Sunset

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Studying economics takes years and does not even guarantee a proper understanding of how the economy actually works. Thus it is both sobering and intriguing to watch Milton explaining the importance of free markets and free trade in just two minutes.

When you go down the store and buy this pencil, you are in effect trading a few minutes of your time for a few seconds of the time of all those thousands of people.

It was the magic of the price system, the impersonal operation of prices that brought them together and got them to cooperate to make this pencil, so that you could have it for a trifling sum.

To be honest, it was not Milton to come up with this pencil story. It was American economist Leonard E. Read who wrote I, Pencil in 1958.

Not a single person on the face of this earth knows how to make me.

Yet, there is a fact still more astounding: the absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work.

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A couple of months ago former member of the Executive Board of the Deutsche Bundesbank caused a huge discussion about immigration with his controversial book Deutschland schafft sich ab (Germany Does Away With Itself). If you thought this debate was too unsophisticated, Mark Steyn could be a better choice for you. For Uncommon Knowledge he discusses his recently published book America Alone: The End of the World As We Know It:

Personally, I do not agree with all of his points. But as he raises several noteworthy points I would definitely recommend watching the video.

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Two recent NY Times articles argue that improving both teacher’s low salaries and reputation are key to solving educational problems in the United States.

Pay Teachers More

U.S. Is Urged to Raise Teachers’ Status

Without much ado, this analysis can be transferred to European countries. Both articles draw heavily from a 2010 McKinsey study titled “Closing the talent gap: Attracting and retaining top-third graduates to careers in teaching”. By means of several bold statements the authors justify their policy proposals:

Top performing nations recruit 100% of their new teachers from the top third. In the U.S. it’s 23% and 14% in high-poverty schools.

Average teacher salary [in the U.S.] as a percentage of GDP has decreased at roughly 2% per year.

With regard to Germany however, the study states that German teachers’ salaries as percentage of GDP rank among the top 3 worldwide, way beyond OECD average. That is probably why the second NY Times article might be more relevant for Europe’s largest economy. Taking into account that wages are generally quite low in Germany, teachers perform relatively well. (Although this is hard to understand from a Swiss point of view.)

But what is truly preventing Germany’s top-third graduates to become teachers is the job’s awful reputation. Some decades ago German parents addressed their children’s teacher with “Mr. Teacher”. Doing this in 2011 would be nothing but strange. In addition, the decision to become a teacher implies low opportunities of fostering your career. Being stuck a lowly state-run bureaucratic school is in no case comparable to a shining career in a successful private company.

Simply raising overall paychecks for teachers and launching a reputation campaign is clearly not the answer. But changing teacher training at universities by heavily raising requirements, increasing incentives for top students to become teacher (financial benefits, improved career opportunities), and performance-based salaries would be a starting point. Notabene, this would be way more easy in a private education system. But yeah, that’s a different story.

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Time and again people regard capitalism / free market economies as being at odds with morality. Greedy businessmen are said to care about nothing else than profits and their bonus payments.

Recent developments in Japan have induced some people to argue that energy corporations ought to be run by the government instead of (voracious) private businessmen. Allegedly, this would put more emphasis on safety and environmental protection. Due to less pressure on being profitable state-run enterprises could afford to pay for societally beneficial investments. Looking at Tepco in Japan and BP in the U.S. one might be tempted to agree.

However, nothing could be further from the truth. We only have to consider the case of Chernobyl to have scruples about the superiority of state-run reactors. It was precisely in the socialist countries where environmental pollution surged to largest degrees. The reason is simple: having a sound environment is a luxury good. That is to say, demand for environmental protection rises with income. Unless you can afford a decent standard of living you simply do not care about pollution.

Furthermore, the disaster in Fukushima was caused by a natural catastrophe. This would have happened under any economic/ political circumstances. The fact that safety regulations were (presumably) too low is not a question of whether energy companies are private or not. It is a question of whether the constitutional state is working properly. The government lays down the rules. It ought to think thoroughly about every aspect to create the right incentives.

To give brilliant example of how to correctly analyze safety issues let us have a look a particular case in the United States. Professor Friedman was asked how the government should react to a car company’s calculation of potential deaths by waiving a $13 plastic piece that would prevent gas tanks to explode in some cases. In a second case he was asked whether an energy company ought to be allowed to switch off the current if some poor people cannot afford the bill.

The government has a right to provide courts of law in which corporations that deliberately conceal material that is relevant can be sued for fraud and made to pay very heavy expenses.

That was what the Japanese government should have done and what other governments should do in response to the Fukushima disaster. Provide a constitutional framework, penalize misbehavior, and let people decide about what level of safety they are willing to pay for. Alternatives to nuclear power might be safer but also considerably more expensive. New techniques have to be developed and in the end customers will have to bear the costs. Germany’s decision to shut down a couple of reactors has already caused electricity prices to surge by about 20 percent. Regarding the imminent costs that Japan will face, probably still a good deal.

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As it stands the danger of a nuclear disaster beyond all expectations in Japan is real and let’s hope our fellow men in Japan can prevent the worst. May God help them.

The question this catastrophe has already raised is what we have to learn from the dreadful happenings in Japan. Thousands of Germans came up with an instant reply: Shut down nuclear power plants in our country!

But maybe we ought to think a little bit more thoroughly about how to deal with the issue of energy supply in the future. What is the role of government in this field, how can we overcome the nuclear age and prevent disasters such as the current Japanese one?

First of all, there is no special role for the government with regard to energy supply. Private companies ought to be free to produce and sell electricity to their customers just like other companies sell Internet or mobile phone services. However, the government is right to intervene the free market whenever third parties are involved. Take the example of a nuclear power plant: the operator makes contracts with clients but not with people living close to the plant. Since the latter are (presumably negatively) affected by the presence of the nuclear power, they have a right to either be compensated or to forbid the whole operation of the plant.

In many cases there are two simple solutions for such externalities. First, the respective company can set up a contract with all affected people. This requires clear information on who is affected as well as how much damage is caused by the polluter. The second solution applies to cases where the number of possibly affected people is large and diverse: tax the pollution. This method is used for instance to compensate for the external effects of driving a car. It is virtually impossible for anyone to make a contract with all other people that might suffer from a slightly reduced air quality. However, by simply taxing gas motorists have an incentive to improve fuel efficiency and the society as a whole can be compensated for air pollution by respective uses of tax revenues.

All that said, what about nuclear power plants?

In theory this is just another case of externalities that the government should price into the costs of energy production. However, the external effect of a nuclear power plant is hard to estimate. Without any accident we can reckon the costs imposed on third parties to be negligible. But for sure there is a small chance of facing another Chernobyl / Fukushima. Even though the risk is minuscule we have to deal with it (as the two mentioned catastrophes taught us). The trouble however is that the costs imposed on third parties in case of a disaster are beyond everything a single private company or insurance firm can bear. Thus it is not feasible to oblige the operator of a nuclear power station to make provisions for the worst case (Just remind yourself of the BP disaster last year). The potential damage of a nuclear power station is simply too large to allow the operation of the same. This becomes clear if you realize that even 25 years after Chernobyl, sparsely populated Ukraine still spends about five percent of its GDP on preventing further leak of radiation (not to mention the lost output due to the prohibited area).

So, just pull the plug?

Well, no matter how you look at it, Germany is simply not in a position to shut down all their atomic plants within a short time frame. German governments of the past sixty years have spent literally hundreds of billions of Deutschmarks / Euros on subsidies to energy suppliers. This created an incentive to put more emphasis on the technique and led to a whopping twenty-five percent share of nuclear power in the total energy production. This share is among the highest in the world and very similar to the Japanese one. Now the shit has his the fan and Germany is stuck in a situation where atomic power will remain a necessary source of electricity for the next ten years at least.

It was the red-green coalition led by chancellor Gerhard Schroeder that realized the problem about a decade ago. They decided to successively lower the importance of nuclear power by subjecting the technique to a deadline for about 2021. This was to give private energy companies both a clear legal framework for the future as well as an incentive to develop alternative techniques. From an economic point of view, this was a remarkably wise decision (let aside subsidies for solar, that’s a different kettle of fish).

However, both the Christian democrats and the liberal party spoiled the whole project. They offered electric firms a different deal by suggesting to prolong the residual term. This changed the incentive of Eon & Co. to not invest in new technologies but in a return of a CDU-led federal government. Lobbying (i.e. spending a couple of millions on election support) was simply superior to investing billions of Euros in future technologies.

To cut the long story short, they succeeded in fall 2009 and just one year later the newly elected CDU-FDP government prolonged residual terms for most of the nuclear power plants in Germany. Half a year later, the Japan disaster has elucidated everyone that this was a preposterous decision. Consequently, chancellor Merkel changed sides within a few days, now supports quick closures of old reactors and withdrew the prolonged residual terms.

Basically, we’re back to the 2002 compromise. Unfortunately a couple of scars will remain:

  • Private businesses wasted a good chunk of money on preposterous lobbying.
  • In addition, they have invested less in alternative technologies than they would have if CDU/FDP did not offer the prolonged residual terms.
  • Changing the whole legal framework twice within a few months further damages the reputation of German law. Companies will reconsider long-term investments in Germany as a result of what happened.

The upside is that lobbyism did not pay off and the CDU-FDP coalition got the punishment they deserved for last year’s despicable compromise. With more than half a dozen elections ahead in 2011, Merkel and Co. will face substantial losses as a result of their miserable policies so far.

I am not saying that other parties would have done a better job. But quoting Cora Stephan’s recent book title, Merkel was a mistake. Rarely before, any government has done so little and so much crap within its first one and half years. It’s a shame they needed a nuclear catastrophe to realize their mistakes.

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The accusation has been made over and over again: current U.S. president Obama is a socialist. On the one hand this is an absurd allegation since Obama is certainly not in favor of nationalizing means of production in the United States. But taking a deeper look at his career and changing the definition of socialism to community organization, Stanley Kurtz concludes Obama is indeed a socialist:

Unfortunately, the interview does not include the discussion of current Obama policies. But for once it is quite obvious he has done little else than increasing the role of government. In addition, Kurtz argues Obama has never presented an ideological theme that his policies follow. Clearly however, there ought to be some long-term intentions for U.S. policy. And in the case of Obama, there is quite some evidence that some sort of socialism is his long-term goal.

As for myself, I wouldn’t call Obama a socialist using the classic definition of nationalizing means of production. Nonetheless, there is hardly any law Obama has passed that would find my support. And it is important to realize that unlike in the past, nowadays you will not see one politician that is going to turn the whole economic system upside down. Instead, we will observe a series of tiny changes in the wrong direction that, slowly but surely, lead to less freedom, less justice and less overall wealth. Obama is groping for stones to a situation where at least one thing in the U.S. will become out-fashioned: the word liberty on each coin of the United States dollar.

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A couple of days ago, I wrote about Paul Collier’s 2007 released Bottom Billion and his suggestions to tackle global poverty. In a more recent article for Project Syndicate he explains an additional way for alleviating destitution in Africa: natural resources

The Last Resource Frontier

In the coming decade, extraction of oil, gas, and mineral ores will constitute by far the most important economic opportunity in Africa’s history.

According to Collier, transparency might prove to be of utmost importance for Africa to avail itself of the opportunities ahead. However, his optimism is tarnished due to all the failures of the past decades. Let’s hope he’ll be wrong.

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Ever heard of Ayn Rand?

No? Well according to a 1991 survey conducted for the Library of Congress and the Book-of-the-Month Club Rand’s Atlas Shrugged was the second most influential book in the respondent’s life, just after the Bible. And Modern Library’s 1998 nonscientific online poll of the 100 best novels of the 20th century found Atlas Shrugged rated #1 although it was not included on the list chosen by the Modern Library board of authors and scholars.

So, who was Ayn Rand (1905-1982) and what is Atlas Shrugged about?

To put it simply, it is Ayn Rand’s fourth and last novel, first published in 1957 in the United States. The book itself explores a dystopian country where leading innovators, ranging from industrialists to artists, refuse to be exploited by society. The main protagonist sees society collapse around her as the government increasingly asserts control over all industry while society’s most productive citizens, led by the mysterious John Galt, progressively disappear. Galt describes the strike as “stopping the motor of the world” by withdrawing the “minds” that drive society’s growth and productivity. In their efforts, these “men of the mind” hope to demonstrate that a world in which the individual is not free to create is doomed, that civilization cannot exist where men are slave to society and government, and that the destruction of the profit motive leads to the collapse of society.*

So much about the mere story. But why has this particular book influenced such a great deal of people (about eight percent of Americans have read the novel)?

First of all, there is much to hate about the book. Quoting Harried Rubin, “Both conservatives and liberals were unstinting in disparaging the book; the right saw promotion of godlessness, and the left saw a message of greed is good”. The critics were very tough on Rand. In fact, she is said to have cried every day as the reviews came out. However, all these negative reviews induced equally strong statements in favor of Atlas Shrugged. To quote John A. Allision, former CEO of BB&T (one of the largest banks in the US), “I know from talking to a lot of Fortune 500 C.E.O.’s that Atlas Shrugged has had a significant effect on their business decisions, even if they don’t agree with all of Ayn Rand’s ideas. It offers something other books don’t: the principles that apply to business and to life in general. I would call it complete.”

A 2007 article by the NY Times called the novel a glorification of the right of individuals to live entirely for their own interest. Indeed, Ayn Rand was always very insistent with her arguments. The role of government she advocated was very limited, to say the least. In her view, pure capitalism was not just efficient but also ethically sound. In addition, she voted for a separation of state and economics just like the separation of state and church, suggesting this would lead to peaceful cooperation among individuals.

Personally, I am not sure whether to agree with all of her statements. First I have to read the 1,200 pages novel. But as a foregone conclusion I would suggest Darla Moore’s judgment: “She wasn’t a nice person. But what a gift she’s given us.”

PS. There have also been many efforts to bring Atlas Shrugged to the cinemas. However, every initiative failed until very recently. Thanks to Paul Johansson, the movie will be released on April 15, 2011.

*paragraph mostly copied from Wikipedia

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Right next to campus we’ve got a traditional Swiss farm with a beautiful sunset in the back. Admittedly, I should have used a real digicam and also been one or two minutes earlier for this to become a perfect picture. Quite a nice impression though.

Farm and sunset next to St.Gallen campus

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