How a busted washing machine revealed to me the problem with the consumer economy

Our washing machine now makes a noise like an angle grinder. It started doing it two weeks ago and the spin cycle requires us to vacate the house or risk our eardrums.

This cannot last, so after ruling out repairs (it’s quite ancient) we are thrust into the market for a replacement.

I have some experience in the washing machine market. I bought a second-hand unit for under $200 a few years ago. It caused regular flooding and I came to know its innards closely as I pulled it apart and refitted the drainage mechanisms every other weeks.

I want a brand new machine, with warranty. How to choose?

My partner had a simple decision rule. Buy The Best. She fixated on a German brand, Miele. I was all for it until I heard about the $1500+ price tag.

I had a more complex decision rule. Satisfice by balancing off energy and water efficiency, online reviews, price, etc. 

We had some stern discussions about whether “value” might mean replacing a washing machine again in seven years time.

In some ways my decision rule was worse than hers. It doesn’t simplify the question very easily. It doesn’t rule out enough to get me toward an answer.

In the end, we settled this the old fashioned way: We had someone who subscribes to CHOICE email us the guide to Washing Machines, picked the top recommendation, then Googled until we found a retailer offering a good price.

CHOICE is a body that compares products for consumers. The fact it exists points to a real problem in our economy. As the range of things on offer explodes, we increasingly cannot tell them apart. 

Don’t blame the companies that sell and market these things…

The problem with our economy is us. We buy products when we don’t understand the benefits. We are easily convinced that the benefits the product spruiks are actually the benefits we seek. We substitute decision rules (aka heuristics) for actual analysis.

Do I want to Lie Flat on the way to Perth? Do I want to Control my Income using Annuities (to take just two examples from ads in a magazine I have here)? How can I know if some other aspect of my trip to Perth or my income is more important?

Smart people recognise that they can’t be sure of what they want, so they outsource the making of decision rules. That’s where CHOICE comes in.

But really, it’s just more mauvaise foi. We tell ourselves that the criteria Choice uses are the important ones. That the way they balance those criteria are the right ways to balance them. 

We can never know in advance if a product will be right for us. Whether it’s a chicken sandwich or a four-storey house in Mayfair, we buy with our eyes closed. 

This would be fine, if we recognised the issue. But consumers are sure they know. When we make a heuristic that says – I buy this brand of muesli because I got it last time, we don’t admit “the benefit of finding a better muesli is worth less to me than the cost of searching.” We say: “This is my favourite.”

The new ABC TV show the Checkout (which is very fun for something so serious and packed with info) illustrated this beautifully with a recent segment on Superfoods.

We refuse to admit or acknowledge the doubt around goji or chia seeds or whatever, because the certainty of buying and eating them is so much more appealing. The problem with the economy is us. And there’s no real chance we are going to change any time soon.

As for the Washing Machine, in the end we chose the Bosch WAP24160AU. Fabian from the Good Guys in Preston is going to fix me up with a great price.

“Good decision. It’s the best machine there is,” he said.

A deficit tax: Now we really do have a Budget Emergency

Tony Abbott is floating a special deficit tax. If you earn over $80,000 you’ll be up for an extra $800 in tax next year.

Here’s four reasons it’s a bad idea, (and one reason it’s not so bad).

1. We do not have a Budget Emergency. Yet. Our deficits are small and our debt is manageable. What we do have is a looming structural trainwreck as health spending rises while labour force participation falls. A short-term Budget deficit tax fixes the non-problem, while ignoring the real problem.Image

2. Raising taxes while the economy is in poor shape won’t help the recovery. Australia’s growth has been meagre and our unemployment rate rising for most of the past few years (with a blip down in April’s numbers). Smart economics says to spend more and tax less when you’re trying to induce a recovery. This is Keynesianism.

3. Keeping the focus of the budget on the deficit (simple, easy to understand, irrelevant) misses the opportunity to make the budget about something important.

4. If we are so allergic to a deficit of a few billion, we may never borrow again. With Australia’s long-term government bond rate at 3.93 per cent, borrowing is cheap right now.  If we are ever to build any infrastructure round here, we need to borrow money. (Infrastructure costs a lot now and pays off in the long run, so if buy it using cash current generations subsidise later ones). Insufficient borrowing will mean the country comes crumbling down round our ears.

BUT

5. It’s hard to imagine Treasury proposing this idea to the government, except perhaps as a second-best alternative to slashing a lot of programs, and only if the government was hell-bent on returning to surplus immediately. Where you do discern the fingerprints of the department is in the progressive design of the tax, that would mainly slug high-income earners:

[It would] “cost earners on $80,000 at least $800 a year rising to an extra $8000 a year for those earning $400,000 a year.”

Hitting the high income earners may work for Mr Abbott politically too. He hurts only people who are likely to vote for him anyway, keeping western Sydney sweet. That means the people with the highest tendency to consumer their income won’t be hurt, so the economic effect of the tax will be more muted than if it were shared equally. 

Apparently there is a backbench rebellion against Mr Abbott’s paid parental leave scheme, which has s price tag of $5.5 billion, and is genuinely not a clever policy. I’ve written before about the economics of cutting it – reducing eligibility from incomes of $150,000 to $100,000 doesn’t make much of a saving – you’d need to be much bolder.

 

What Google should do to make Ingress more popular

Google released a new smartphone game called Ingress late last year.

It’s extremely sophisticated, and very addictive. But it’s also very off-putting and not that popular.

Let me explain.

I downloaded the game knowing nothing about it . I was looking for a puzzle game to occupy a few neurons, and the Google Play Store suggested Ingress. 

I opened the app and it said to navigate to the nearest “portal.” “Walk,” it told me. I tried shaking the phone, dragging the icon, double-tapping, everything I could, but I couldn’t get my icon to move. 

Then a realisation dawned. Walk meant walk.  It wasn’t really a puzzle game at all.

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Near a blue portal

The game is an augmented reality game, built on top of Google Maps. You have to move around in physical space to play. Part of its appeal is getting people out there in the world interacting with “portals” that are almost always on public art or historic parts of the city. There’s an elaborate back story about exotic matter spilling into the universe.

But the game is dreadfully designed for mass-market impact. It is absurdly complex and hard to learn. In the first hour I played it, I twice put my phone back on my pocket out of frustration, swearing to never again play. (Obviously, these sworn oaths wore off).  

It’s a team game. The portals I mentioned have two functions. First, you use them to get items you need to play. But second and more importantly, you can convert the portal to your team. There are blue and green teams and they compete to capture these portals. 

My computer-game obsessed friend (who works for a computer game company and spends his life playing games) says he finds it not too complex. But I took a couple of days to feel like I knew what I was doing. Then it took over a week to no longer make mistakes. It does not fit the chess mould of “a moment to learn and a lifetime to master.”

There are six different actions you might take at a portal (hack, deploy, recharge, mod, link, fire). There are also around 40 different items you can collect from a portal, and rules about how and when you may use them. The game grows even more complex, verging on annoying, when you first try to learn how to link portals to make some “fields”. (Ostensibly this is the primary goal of the game.) Check out this YouTube video on field theory if you want to be put off forever.

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How Melbourne looks through the eyes of Ingress

The language of the game is wholly foreign too. You need to learn about resonators, XM, AP, XMP bursters, multi-hacks, glyphs, and portal keys. The way they all work is not intuitive. Once you’re over the learning curve, of course, these are terrific fun. But that curve is very steep and the language is off-putting in another way.

 

The game is inherently nerdy. The set of people willing to scale the learning curve will be limited to those who are interested or experienced in gaming and science fiction. 

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One of over 200 items in my inventory

Trying to describe the game dynamics to others has led to a lot of blank stares (blank with judgmental characteristics). Just the words “hack the portal” are enough to turn 99 per cent of people off. But the fundamental concept of walking around, visiting new parts of your neighbourhood and capturing territory is something that could appeal to anybody, young and old, male, and even – wait for it – female.

All this is relevant because the game works best – is most competitive – when there are lots of players. This is a concept known as the Network Effect. As the number of people involved in a network rises steadily, the usefulness of that network rises exponentially. The game at the moment – in Melbourne at least – is a little static and features a few names popping up time and again. 

And for Google, the more players the better. The game’s secret purpose is to discover better pedestrian paths and send them back to the Google Maps HQ, to improve the operation of way-finding.

Google could win over a lot more players quite easily. And that’s why this blog post is more than just a whinge on a fringe topic, but an idea that could be quite powerful.

Imagine an interface for Ingress that, instead of Enlightened vs Resistance, was Kittens vs Pirates.

Instead of “portals,” you’d have castles. Instead of “hacking” you’d “visit.” Instead of links, you’d build walls and instead of fields you’d build Pirate Lairs or Kitten Sanctuaries.

Instead of “resonators” you’d have kitten guards, to guard your kitten castle. Weapons would not be XMP bursters but a sardine catapult, to distract the kitten guards. Make the graphics cute and that would also go a long way to giving the gameplay more appeal.

The game mechanics needn’t even be simpler, because the familiar and more welcoming tropes would help people come to grips with them. This would be an example of Skeumorphism (like using a picture of an envelope to represent an email). A proven technique for acclimatising users to a new interface.

If Google brought this in as a new “skin” for Ingress they could break into larger demographics. The best part is that they would not have to lose the original skin. The two games could be wholly integrated. The original players could still see Kitten players as Blue and Pirates as Green, and have no idea they played the game quite differently. 

If that helped broaden the appeal, even more skins could be launched. Beatles vs Rolling Stones. Manchester United vs Barcelona. Plants vs Zombies, or Democrat vs Republican. Whatever. The bulk of the coding work must be in the game mechanics (which is excellent and rarely crashes). I’m sure inventing a new interface would be a relatively minor challenge.

The concept could be extended to other areas in which big data might be useful.

A game that entices people to submit driving data, for instance, diet data, or maybe shopping data. You could multiply the number of interfaces available until you have a good sample of people involved. Games work beautifully for data collection because they are wholly opt-in. Companies or organisations that want certain demographics to do so could tweak the front end until they find a recipe that lures them in sufficient numbers.

The Internet is Proving Quite Popular. (Or, Why I Might Be Wrong On The NBN)

I’ve written before on the National Broadband Network, under the following headings:
National Broadband needlessness.
National Broadband Nuff-Nuffs.
I believed the cost of the NBN was too high, the case for it had not been made, and the idea of rolling out fibre to every premises failed to recognise the differences in need between certain types of premises.

Also, I wrote this:

“I think there is a cap on how much data we can consume. No doubt data demand is increasing. From 286 MB/month in 2000 to 14,909 MB / month in 2009. But this is a result of moving real-world activities like photos and video onto the internet. YouTube’s audience is double that of the three big channels broadcasting US prime-time TV.

Data demand is limited by human constraints. Pixel demand is limited by the size of screens we can fit in our homes, audio quality demand is limited by our hearing and demand for video is limited by the number of waking hours in the day.

Camera megapixels are a good example of this. For about five years after the advent of digital cameras, the number of megapixels available grew exponentially. But then it plateaued at about 10-12. For the majority of people the marginal benefit of more and more data wasn’t worth it.

Similarly, telephone call sound quality is abysmal and noone cares. Most of the value is in the existence of the link not the quality.”

Well, the data is in, and while I hold fast to my fundamental point about eventual data satiation, that point looks far away. Data demand is nine times what it was five years ago.

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There’s another point to make too. Both this data set and my analysis above are obsessed about downloads. But that’s not the only thing that happens on the internet these days. User-generated content is becoming more important.

It was not until I started making a bit of video that I understood how very very poor upload speeds are. The NBN as imagined originally would offer much better download speeds.

Especially for business, upload speeds can easily be a major choke-point. The shadow minister for communications walloped the government with this point earlier in April.

I still believe that the NBN should be subject to a proper cost-benefit analysis and weighed against other investments. It may be the NBN has an extremely positive return but still yields less than public transport investments. In which case we should probably reconsider our aversion to debt.

Also, this argument still stands:

“There’s a big difference between giving hospitals and the square kilometre array incredible internet speed (8 tbps!), and giving incredible internet speeds to every terrace house, flat and bungalow in postcode 3068. Where productivity demands better internet access, users should pay.”

But the idea that data demand won’t create need for the NBN, I concede, looks wrong.

Top Gun-onomics

How would you like to pay $1000 now for an iPhone 10 in 2020?

You’d have to deal with not knowing if Apple will still exist as a company then, if smartphones will still be a thing, and if they will be delivered on time and even have the promised features.

That’s the sort of decision a country faces when it buys a warship or fighter jet.

They commit to the delivery of an extremely expensive product – often a ship or a plane – before it has even been properly invented.

But if you get a smartphone, you at least expect to use it as intended.

There’s every chance that we will have our defence materiel for a 30 year lifespan and never even find out if it does what it says on the box. We sent some bombers to Vietnam, but the only Australian fighter jet action since the Korean war was 14 F/A -18 Hornets that dropped 122 bombs in the first Iraq war. The rest have been limited to training and ceremonial runs over the shrine on Remembrance day. (source)

One of the most interesting economic decisions a country can make is spending its defence budget. At around $7 billion a quarter it’s a similar amount to what we spend on home renovations.

We’re buying safety. But without ever knowing if we needed to spend it to feel safe.

On my very first day at Treasury, in February 2005, I went to my very first meeting with two colleagues from the National Security Unit.

Two senior air force men came to brief us on project AIR 6000. The Joint Strike Fighter. The project was then listed as 100 jets for $12-16 billion. They assured us everything was going well. I remember my clever and apparently prescient older colleague asking tough questions about whether locking ourselves in to Lockheed Martin was such a wise idea.

Treasury did Defence advice. Every time a submission went to cabinet, we got the chance to make formal comments. In one way, the merit of getting Treasury involved is a scarecrow effect. It makes Defence behave better just knowing we were there. We did a lot of analysis but rarely had any real wins as the Howard era coffers overflowed and the procurement juggernaut rolled on.

Field trip which Defence used to try to effect "capture" of young Treasury officers
Field trip which Defence used to try to effect “capture” of young Treasury officers

Just yesterday, the Abbott Government announced it would spend another $12 billion on the Joint Strike Fighter jets, taking Australia’s total purchase to 72. That is fewer than was slated to be bought in 2005 and I see the fingerprints of my Treasury colleagues all over the decision. Kudos to them.

Defence procurement has always been a basket case. Traditionally the US makes its own things with great difficulty then sells them to us. It bears the development costs and we then pay through the nose. Or we make our own things with great difficulty (e.g. those damn subs).

The plan of the JSF program was to re-imagine the procurement process, by having a jointly developed platform owned by all western countries. It would share development costs and thereby reduce the risk to any one country. And everybody got to share in the supply chain, which meant local jobs.

It was just an idea. The risk was a lack of fall-back options. That would mean Lockheed Martin could get away with doing a bad job. That risk was identified and managed eight ways to Sunday with clause upon clause. But clearly no clause is as powerful as the threat of competition.

Is the JSF even a decent plane?

The point of JSF is not that it is agile. It is also not meant to be fast. The F-22 could kill it in a dogfight. Our old F-111s could beat it in a straight line.

It was supposed to deliver superior results by being really sneaky. Low radar profiles meant it could get very close to radar stations before it showed up.

That was combined with high-quality sensors that meant it would discover and network information. So not just one pilot knew where the missiles were coming from or where the bad guys were. Every pilot did. It was not supposed to ever be in a dogfight, because it was meant to shoot before the other plane was in sight.

Is that strategically wise? That is a hot topic. I am not an Air Force pilot, but the thing about a procurement program is that the parameters are set by air force experts. They know what they think will make them feel safe behind the joystick, and go buy it. I am not going to second guess that judgment here.

(Obviously, they set project parameters in 2002, and it’s now 2014 and other countries powers have increased. But that is not an issue just for JSF. It is an issue for all defence projects, because the world moves fast…)

Spending money on defence is difficult. Nobody, I think, would argue we should spend nothing.

But given our island location and our fairly un-strategic location on the way to nowhere, do we really need to be 13th in the world for military expenditure? As for Tony Abbott’s plan to lift expenditure to 2 per cent of GDP, that seems wasteful and quite backward. Should we not think about what we need first, rather than first thinking about how big our budget is?

I’ll leave you with this quote:

“A famous maxim in Australian defence circles is that “strategy without funding is not strategy”. … A reversal of the same maxim also applies to Tony Abbott’s new white paper. Funding without strategy is still not strategy.” (source)

How much will things cost when I’m 50?

Today, the consumer price index is released. Australian inflation appears to be in check, as the RBA keeps a steady hand on the tiller (If you are secretly unsure what the RBA does, click here.). Inflation gets really interesting over the long run.

Let’s look at what the damage will be in 2035, when we’re a lot older. It may shock you.

FOOD

A pie and a soft drink at the football?

I paid $14.40 for a Four’N Twenty pie and a bottle of Sprite on the weekend. The inflation rate for Food and non-alcoholic beverages over the last ten years has been 2.9 per cent a year. Applying that to the next 20 years means that by 2035, your half time snack will be a whopping $26.75.

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BEER

If you want the exquisite contemporary Australian experience of drinking a bottle of Crown Lager at Federation Square, you now pay $9. ImageThe inflation rate for the Alcohol and Tobacco index over the last ten years has been 4.6 per cent a year. Applying that to the next 20 years means in 2035, the price of the beer will be $24. 

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TRANSPORT

A ticket permitting two hours of travel on Melbourne’s ‘world-class’ public transport system costs $3.58. The inflation rate for transport  over the last ten years has been 2.3 per cent a year. The lowest rate we’ve seen so far. Applying that to the next 20 years means in 2035, a ride on a tram will cost $5.87.

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(Of course, zone 1 tickets will rise probably in price faster, since Zone 2 was turned into cannon fodder for the election.)

CLOTHING

A pair of ASICS Gel Kayano running shoes costs $250. In 2035 that will be $235. Wait, what? Yes, it’s not all bad news on the inflation front. Some things have fallen in price in the last 10 years, especially clothing. The average annual price change in the last decade was -0.4. There’s more detail on this in a post I wrote a couple of weeks ago.

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HOUSING

Say you want to buy a two bedroom apartment in West Melbourne with a Bruce Springsteen feature wall, like this one:

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It has at an advertised price, now, of $550,000. Over the last decade, house prices have risen 4.6 per cent a year. If that continues, you’ll be looking at $1.49 million in 2035.

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PAYCHEQUE

Here’s the good news. 

If you have a full time job, and you pay 30 per cent tax on it on average, your fortnightly paycheque, based on ABS average weekly earnings, is $2012. 

The rate of growth of wages in the past decade has been 4.5 per cent. By 2035, that fortnightly paycheque would have grown to $5294.

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ImageWill you be better off? Almost certainly yes. Wages have risen faster than consumer prices for most of Australia’s history, giving us improving real (i.e. inflation adjusted) income (see graph at right).

But if you can somehow arrange to want less housing and beer, and more clothing and shoes, you’re going to be even better off…

 

 

Yes, The Hunger Games is secretly an economics field-guide.

I just finished reading the Hunger Games (book one). I enjoyed it for a reason that might be unusual. It brought back vivid memories of my first-year economics textbooks. To me, the Hunger Games is clearly a secret primer in basic economics.

Incredulous? Look at the title of the book.

Economics is the study of systems of rules that manage scarcity. What is Hunger if not scarcity? What are Games if not systems of rules?

[spoiler alert: spoilers below]

LESSON 1: Free Markets are powerful

The free-market lessons kick in on page five, when Katniss – the heroine of the book – ducks under a fence to go hunting, in defiance of the rules that govern her district, which is both starved and ruled with an iron fist.

Most of the peacekeepers turn a blind eye,” she explains, and we learn that a thriving black market – the Hob – is what keeps Katniss and family alive. Every time she hunts and then sells her kill Katniss defies a death penalty that prohibits trading.

LESSON 2: Central planning and colonisation are bad

The district itself is run as a sort of colony of the Capitol. The Capitol is the centre of a future North America torn apart by climate change.

The district where Katniss lives specialises in coal-mining. The citizens of this colony have no control over the coal production. They are forced to mine and send the coal to the Capitol.  They are prohibited from engaging in commerce or choosing their fates.  The result of their lack of freedom of choice is made clear in the first part of the book:

Starvation’s not an uncommon fate in District 12,” says Katniss on page 28.

The parallels with the colonisation era of the 1800s are clear. The lust for cheap raw materials and labour makes the keeping of colonies highly advantageous. But the citizens have to be oppressed for colonisation to work. Katniss can’t bring her bow and arrows inside the District, because the powers that oversee it fear an uprising. The trade between the district and the capitol is anything but free. You know who else opposed colonialism? The famous economist Adam Smith.

Few services are provided from the capitol back to the colonies. Colonies get some supplies of oil and grain , a few hours of electricity a day, and TV broadcasts that are more like propaganda. When Katniss gets on a train to go to the Capitol to compete in the Hunger Games, it is the first time she has been on any motorised vehicle.

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Same

Then, for a while the economics lessons of the Hunger Games become less about the virtues of free markets, and zeroes in on a particular micro-economic concept:

LESSON 3: Game Theory.

The dynamics of the Hunger Games are brutal. The Capitol forces 24 children from 12 districts into a gladiatorial battle to the death.

Lesson 3.1 Go to the cornucopia?

To start the game, the contestants enter the arena simultaneously, but at a distance from each other. Then they face the first complex and interdependent choice. The centre of the arena (the cornucopia) is filled with useful items. Weapons, food, shelter.

In the short-run, nobody is armed, so going into the centre is risky. It may be worth it if you can defend yourself, so the biggest, strongest players have the incentive to head in to the centre. But it may also be worth it if you think you have no chance without supplies.

Of course, if the weak players yield the advantages of the stash to the strongest players, it makes their job even harder. So some take the risk. Even Katniss. In the end the stash of items is the scene of several quick deaths.

Lesson 3.2 Form an alliance?

The stash of supplies is too big for one player to control, and so the biggest players form an alliance.

The existence of an alliance among the strongest players in the Hunger Games may seem surprising. Any alliance must eventually break down – it is after all a battle to the last man standing. Game theory suggests breaking an alliance earlier rather than later will always be advantageous. But the presence of a stash of food binds them together. They need to be able to have some people sleep while others defend the stash.

If the alliance between the strong breaks down before the stash of food is depleted, the one remaining owner of the stash will be unable to so much as sleep, or risk becoming a target of remaining outsiders. The stash itself is an x-factor that binds that alliance of the strong together, so long as it lasts.

Social factors can also influence the outcomes of prisoners dilemma-style interactions, which can explain a couple of alliances Katniss enters into, especially the one with Rue. Katniss simply likes Rue.

She likes Peeta too, but he is less useful as an ally. As if aware of the implausibility, the alliance of Katniss and Peeta is maintained by a steady stream of rewards that arrive. The payoffs to staying together are higher than the payoffs of moving apart.

Lesson 3.3 Run and hide?

The Hunger Games reward survival, not killing. The optimal strategy at the start of a game is obviously a defensive one. Let everyone else try to kill each other and just wait. It’s only optimal to choose to enter a battle later, when there are fewer than 24 opponents, so as to minimise the chance of stumbling upon someone whilst sneaking up on another.

For that reason it is no surprise the “Gamekeepers” unleash a massive fire on the unsuspecting players very early on. This makes sure hiding is very difficult. The action cannot be allowed to ebb, after all.

Lesson 4: Prices.

Contestants can obtain items from “sponsors”, which are delivered to them in the Game. Later in the game, the price of items goes up dramatically. If we assume sponsors want to help the eventual victor, this makes sense.

Gifts delivered late in the game when few survivors remain are likely to be more effective in securing a win than those delivered early on. So gifts delivered in the last phase of the game are most valuable .

Problems

The book is a sci-fi fantasy and I do not expect it maintain perfect adherence to economic incentives. Two examples stand out.

1. Tesserae. Children from Districts can increase their chance of being selected as a Hunger Games participant in return for a year’s supply of grain and oil.

From the kids’ perspective I understand it wholly. But where’s the upside of this to the Capitol? It doesn’t yield more participants, or more interesting Hunger Games. It probably just costs them more in oil and grain. We are told the point of the Hunger Games is to keep the residents of the capitol amused and the residents of the districts poor and weak. The Tesserae don’t really achieve either of those.

2. Careers. The book wants us to believe that the Hunger Games are dominated by “career” competitors that volunteer to enter and almost always win. But it doesn’t seem plausible.

In the Hunger Games of book one, there are around six “careers.” Each must have an eighteen per cent chance of winning, assuming the rest of the contenders have no chance. For each of them, the risk is too high and the rewards too low. Especially when you consider that the reward of winning is supposedly food and housing, and the “careers” are described as being from “wealthier districts … fed and housed throughout their lives for this moment.”

Given the chances of winning are so low and the upside is slight, the optimal solution for any one district would be to send their weakest, least valuable members.

Big questions about the merits of economic growth.

The Hunger Games also raises very interesting questions about the end-point of economic development.

When Katniss first arrives from the districts, and meets the surgically altered citizens of the Capitol, and eats the endless supply of bountiful food, she asks an important question

“What must it be like, I wonder, to live in a world where food appears at the press of a button? How would I spend the hours I now commit to combing the woods for sustenance if it were so easy to come by? What do they do all day, these people in the Capitol, besides decorating their bodies and waiting around for a new shipment of tributes to roll in and die for their entertainment?”

Katniss wonders what her identity would be without having to provide for her most basic needs. I think that question haunts a lot of people in the privileged parts of the world. We have all the food we need and much much more. Our lives are about comfort, not survival.

I suspect this sense of meaninglessness is why some affluent people seem to spend a lot of time on their vegetable gardens.

The question of giving life purpose is likely to become only more relevant as production of food, clothing and shelter become more efficient. When people’s economic contribution is less and less crucial to survival – making ads, doing graphic design for t-shirts, doing accounting, they may begin to wonder what the real point of wealth is.

I am eager to get into Economics 201 – by which I refer to Hunger Games book 2. Will we see a process of revolution and decolonisation that allow market forces to deliver the districts into a state of freedom? Will there be a surge of immigration to the capitol? Will the book explore the macro-economic implications, including on prices and wages? I can hardly wait to find out.

Google ad revenue falls – what does it mean for the internet economy?

The internet economy is developing before our very eyes. Is it a gold mine? Looking only at the Silicon Valley Ferraris, you might conclude yes.

Or is it going to destroy value and jobs everywhere? Looking only at the newspaper industry you might conclude that every job that involves storing, processing and weighing information – from lawyers to bankers, doctors to teachers – is in deep trouble.

The internet reduces a lot of costs. As consumers we are comfortable with the concept of zero marginal costs. We breathe the air, look at the views, bask in the sunshine.

But as producers, as workers, we get worried. There are no jobs in the “Air Industry.”

The internet means a lot of work is about to be done at zero marginal cost. You build a system that teaches kids their time tables, you can roll it out across the English-speaking world. Teachers quake. Build a system that retrieves data from legal cases and roll it out across the jurisdiction. Lawyers will quake. Build a system that uses symptom data to develop diagnoses and hospitals will take it up while Doctors rend their garments.

But all this is a long way off.

For now, the internet is a lot simpler. The only industries that have been transformed so far are ones where data is simply displayed, not manipulated. Industries like advertising. 

Google shows you ads all over the internet – in your email, when you surf the web, etc. And this transformation has reaped it a large and growing pile of money. 

Until now.

Google revenues have fallen in all categories in the first quarter of 2014.

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Meanwhile, costs rose and operating margins fell to 27 per cent. This was quite a surprise and the stock fell sharply in after hours trading.

Of course Google is still profitable, and Q1 2014 beat Q1 2013, but the movement in the trend provides another data point to support the second hypothesis above, that the internet-isation of our economy will not involve a lot of money.

The internet is just a distribution mechanism. Making information for distribution still takes work, at least for now. But economic theory says the cost of a good will fall to its marginal cost. The predictive power of economics is pretty impressive when you look at how many newspapers are free, how many TV stations are free, and how many movies get pirated.

Whether companies will find ways to get people to pay for information products is an open question.

 

But if the “zero marginal cost” feature of the internet economy proves to be decisive, investors will lose a lot of money. Evolving views on this “big question” may explain why the Nasdaq – the technology stock index – surges and falls with more volatility than other bourses.

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Some investors clearly already worry about the profitability of technology companies.

But money is not everything. The world in which zero marginal cost is decisive could be a good one.

Imagine if air was made in big O2 factories, and you had to buy a subscription. Would you be better off, or worse off?

So it could be with a lot of technology. We may be better off in an economy where there are slightly fewer jobs but much more that you can consume for free.

Even if the robots don’t get up to scratch and we need people to make information products for free, will we be able to expect them to do so? Let’s look past the evidence that they will (YouTube, blogs, most short films, most bands, Open Office, a lot of apps, Wikipedia, etc.) to the theory.

The concept rests on the idea that people have a “cognitive surplus.” You can meet your basic needs (food / housing) without using up all your week. Then you have time you can spend doing things that look like work. 

This cognitive surplus may come in a certain phase of life. You may be a child or a student or retired. Or you may have a cognitive surplus because you work part-time, or because you are still full of beans in the evening when you get home from your “real” job.

The you use that cognitive surplus to do things that look, to the outside observer, like “work.”

The fact that a cognitive surplus needs to be defined and explained, really shows the incredible power of one of economics simplest models: breaking your day up into Leisure and Labour. 

The model is pervasive. People use it to do all sorts of calculations about how much they should pay to save an hour of leisure, etc. But it’s also kind of stupid. Commuting is neither leisure nor labor. Neither is washing your work shirts. The category of unpaid labour is invented. For washing the floors, sure. But does it include baking a cake? Digging in the garden? Building a treehouse? You can enjoy unpaid labour.

Slate economics blogger Matthew Yglesias goes on and on about the enjoyment of your job, calling job amenity value the most neglected subject in economics. Of course you can enjoy paid labour too. This is just another way in which the binary “paid labor vs unpaid leisure” model of life is defunct. 

 

The internet could end up making the leisure/labour model look even more stupid, if people accept they won’t get paid for things that were once deemed work, and do them anyway.

They’re spending their cognitive surplus. Is it leisure or labour? Wrong question.

If the zero marginal cost economy takes hold, quality of life may even go up, because people can consume more. It’s the same sort of change that came upon society when the printing press was invented – a huge decrease in the cost of distributing information, and a lot fewer book-binding jobs for monks, which caused a fuss at the time.(And of course the printing press itself wrecked a few legacy institutions.)

But a zero marginal cost economy won’t wreck the whole economy. There will always be plentiful jobs in things that are not zero marginal cost. Humans need food and housing and transport and always will.

If you’re worried about the rise of the internet, invest in something concrete. Like iron ore mining, or potato farming, or logistics. These industries will continue to sell things, hire people, and make money.  

A surprising thing about Google, and the economics lesson it teaches us.

I learned something surprising about Google this week.

Their spam-filtering software lives an amazing double life.

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I’ve known for some time that if you fill in this form (to post a comment on a blog, or whatever), you need only type the number on the right – it will ignore the number in the photograph. That was perplexing.

Then I discovered Google is using us. When you type the number in the photo, that gets sent to Google Maps, where it answers a question being asked by Streetview – ‘what street number is this?’.

This is quite brilliant. They apparently also use this program, called ReCAPTCHA, to decipher words the software can’t untangle when scanning books. So every time you post on a blog, you’re contributing to the quality of streetview, or scanned books.

Ingress by GoogleThe idea is so clever that Google now has software that is entirely designed to trick us into doing work for them.

I am talking about the “game” called Ingress. I downloaded this last week, because it was free and the Google App store told me it was highly regarded.

I opened the app and when it told me I had to “walk” to achieve the missions, I started pinching the screen, tapping, even shaking my mobile device to figure out how to “walk.” Soon it dawned on me. “Walk” meant “walk”. 

The app is designed to collect data on the walking distances, way-finding and walking time between landmarks, especially those which are in pedestrian areas not covered by the Google streetview system. (The game itself is pretty intriguing but also pretty confusing.)

The lesson of all this is the power of a big company – there are amazing things you can do inside a company that you couldn’t do outside.

One of the last century’s most famous economists – Herbert Simon (Nobel Prize in Economics 1978) argued the existence of companies actually showed markets’ weaknesses. (Here’s his great 1991 paper, Organisations and Markets.)

Inside companies, exchanges are based on relationships, not market payments. Unless you get paid piece-work, you are rewarded for being there, not for every article you write, or every ministerial briefing, or every line of code. You do the work because they trust you to do it. You are getting paid, sure, but you trust that working hard now will lead to reward down the line. It’s not specified in the contract.

Every time a company expands, they are saying that they have more faith in using relationships to get the output of the people they just hired, than using the market. The reason is transaction costs. 

Google is a monstrous, monstrous beast. It now has 47,756 employees, and if they are as happy as my friend who works there, they are very happy indeed.

While Google is tricking us into doing work for it via non-market transactions, Amazon is arranging to pay people to do similar work.

They have a “marketplace” called Mechanical Turk, where you can get stuck into the task of diong things computers can’t. Maybe selecting which photo of a landmark is clearest and best, transcribing some audio, or similar.

But it has been controversial. Bloggers complain the pay is too low and the jobs listed are themselves spam, the term digital sweatshop is being thrown about, and the Huffington Post has written about “Amazon’s new underclass.”

But there are many tasks, like completing surveys or any crowd-sourcing task, where low effort from lots of people delivers a better result than lots of effort from a few well-paid people.  Google seems to have this figured out – the market is not always the best solution.

Why Labor should have made equality a key budget figure.

The Budget comes out on 13 May, and when it does, one thing is for sure. Everyone will get in a flap and a lather over the wrong things.

The Budget is a whopping lump of documentation, and many of the people sent to cover it are inexpert in matters fiscal.

So at the end of the day, an inordinate number of stories will be simply about “the deficit.”

It’s one of only a few simple numbers in the whole Budget. Earnings minus Spending, delivering a binary result: Surplus/Deficit. Good vs Bad. It’s quite graspable.

But it is very hard to find experts that care about each year’s budget deficit. (1, 2, 3, 4.)

Forecast deficits are more important, but the actions that need to be taken to get the ship in order long-term are often counter-productive if you want a surplus ASAP.

Stressing over one year’s budget deficit is akin to stressing about the score in a five minute period of a game of football. Sure, the end result is made up of periods just like this one. But experts understand that the game turns over a longer period than just five minutes.

Sometimes you are kicking into the wind, and a deficit score can be okay. Sometimes you run a deficit on purpose, to prop up the economy or grease the wheels of reform.

Raising funds to cover a deficit is easy and cheap at the moment.

Headlines that scream Deficit! and Surplus! – complete with a cartoon of a treasurer either pulling out his pockets to show they are empty, or otherwise evilly grinning and hoarding cash – would be better spent focusing on what matters.

The way to train people’s focus onto certain matters is to measure and report them.

“If you can’t measure it, you can’t (media) manage it,” as they say.

Labor had the opportunity to remake the focus of the Budget, but lacked the foresight.

They could have put the budget balance in size eight font and tucked it away down the back. Obviously you can’t take away the food bowl and expect the media to sit there wagging their tail. You’d need to give them something else.

When in power, Labor could have chosen any number of other measures to make the focus. Productivity, the need for tax reform to fund the NDIS and Gonski, composition of revenue, efficiency of government service delivery broken down by department, or even equality.

Politically speaking, this last one might have been quite useful.

The Australian economy has been characterised by a fall in the compensation of employees (COE), relative to profits.

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The National Accounts, from where these graphs come, note: “The profits shares recorded since the late 1980s are at a distinctly higher level than those reported at any time since 1959–60.”

I do not suggest that at the moment there is a crisis in equality in Australia, but I suspect many people think Australia could do better. And there is a choice to be made as Australia equips itself with policies for the next decade. Do we want to be Sweden or America?

People realise policies that promote freedom and small government can lead to inequality of outcomes. Mostly they accept that, until the inequality is bad enough to undermine the society expected to enjoy that freedom.

In the US, inequality is so bad that Walmart now is forced to declare as a material risk to its earnings, any changes to  Government welfare cheques that would further impoverish its customers. (from the Wall Street Journal).

It’s hard to have a mass market business if the mass market is so poor. And in America, the focus of inequality is no longer on the 1 per cent but the 0.01 per cent.

The evidence is not finalised but much of it is pointing in one direction – rules that promote equality inside a market economy are correlated with happier people. The Labor party has as its assistant Treasurer a man who authored a lot of the research on inequality in Australia, Andrew Leigh.

The Budget is the best time to try to introduce a new concept or issue into the economic debate, because that is when the greatest number of Australians are paying attention. Using the budget to shape the environment in which economic policy is played is going to yield better long-run outcomes than playing another round of The Deficit/Surplus Game.

Even if the other side gets back in and removes that statistic from the Budget, the public – by then attuned to expect this data – gets the sense the new team is hiding something.

If the Coalition wants to be smart, they can pick a concept (assuredly not inequality, but perhaps labour productivity, days lost to industrial action, rising health spending or a measure of how free Australian markets are) and use that as a central theme.