What are the key patterns that maintained us and increased our numbers?
Humans are, on net balance, builders rather than destroyers. The evidence is that the civilization which our ancestors have bequeathed to us contains more created works than the civilization they were bequeathed.
If one notices only the using-up and destructive activities of humankind, without understanding that constructive patterns of behavior must have been the dominant part of our individual-cum-social nature in order for us to have survived to this point, then it is not surprising that one would arrive at the conclusion that resources will grow scarcer in the future.
High fertility leads to increased chances of survival of the group. High fertility leads to resource problems which then lead to solutions to the problems which usually leave humanity better off in the long run than if the problems had never risen.
The concept of the second law of thermodynamics underlies a vision of the human condition as inexorably sliding toward the worse in the long run. The concept of entropy is unquestionably valid and relevant for a closed container in the lab. It may also be relevant for any larger entity that can reasonably be considered a closed system. But the earth is not a closed system because both energy (from sun) and matter (cosmic dirt, asteroids, debris from many planets) constantly rain down on the earth. With respect to energy there is no practical boundary surrounding any unit of interest to us, and without such a boundary, the notion of entropy in the large is entirely irrelevant to us.
10/30/2012
Infinite natural resources
Natural resources cannot be measured and thus they are infinite. The supply of natural resources is not finite in any economic sense, which is one reason why their cost can continue to fall indefinitely.
Increased scarcity causes the development of its own remedy. This is the key process in the supply of natural resources throughout history.
Improved efficiency of copper use not only reduces resource use in the present, but effectively increases the entire stock of unused resources as well.
Principle: more people, and increased income. cause resources to become more scarce in the short run. Heightened scarcity causes price to rise. The higher prices present opportunities and prompt inventors and enterpreneurs to search for solutions.Many fail in the search, at cost to themselves. But in a free society, solutions are eventually found. And in the long run the new developments leave us better off than if the problems hadn't risen.
Discoveries of improved methods and of substitute products are not just luck. They happen in response to an increase in scarcity--a rise in cost. Even after a discovery is made, there is good chance that it will not be put into operation until there is need for it due to rising cost. Scarcity and technological advance are not two unrelated competitors in a Malthusian race; rather, each influences the other.
A conceptual quantity is not finite or infinite in itself.
The concept of diminishing rate of return applies to situations where one element is fixed in quantity and where the type of technology is also fixed. But neither of these factors applies to mineral extraction in the long run. Whether the cost rises or falls in the long run depends on the extent to which advances in tech and discoveries of new lodes counteract the tendency toward increasing cost in the absence of the new technology.
Increased scarcity causes the development of its own remedy. This is the key process in the supply of natural resources throughout history.
Improved efficiency of copper use not only reduces resource use in the present, but effectively increases the entire stock of unused resources as well.
Principle: more people, and increased income. cause resources to become more scarce in the short run. Heightened scarcity causes price to rise. The higher prices present opportunities and prompt inventors and enterpreneurs to search for solutions.Many fail in the search, at cost to themselves. But in a free society, solutions are eventually found. And in the long run the new developments leave us better off than if the problems hadn't risen.
Discoveries of improved methods and of substitute products are not just luck. They happen in response to an increase in scarcity--a rise in cost. Even after a discovery is made, there is good chance that it will not be put into operation until there is need for it due to rising cost. Scarcity and technological advance are not two unrelated competitors in a Malthusian race; rather, each influences the other.
A conceptual quantity is not finite or infinite in itself.
The concept of diminishing rate of return applies to situations where one element is fixed in quantity and where the type of technology is also fixed. But neither of these factors applies to mineral extraction in the long run. Whether the cost rises or falls in the long run depends on the extent to which advances in tech and discoveries of new lodes counteract the tendency toward increasing cost in the absence of the new technology.
Why engineering forecast fuck up
The approach of the engineering analysts who rely on physical
principles is as follows. They estimate quantities and
"qualities" of resources in the earth, assess the present methods
of extraction, and predict which methods of extraction will be
used in the future. With those estimates they then calculate the
amounts of resources that will be available in future years, at
various costs of extraction (in the better forecasts) or just at
the present cost (in the less-thoughtful forecasts).
At the root of this material-technical view of natural
resources is the assumption that a certain quantity of a given
mineral "exists" in the earth and that one can, at least in
principle, answer the question: How much (say) copper is there?
Too often we view natural resources as we view the operation of a single copper mine: Dig some ore, and less is left.
There is one resource that has shown a trend of increasing scarcity rather than increasing abundance, human beings. Yes, there are more people on earth now than ever before. But if we measure the scarcity of people the same way that we measure the scarcity of other economic goods--by how much we must pay to obtain their services--we see the wages and salaries have been going up all over the world. This increase in the price of people's services is a clear indication that people are becoming more scarce even though there are more of us.
Material-technical forecasts of resource exhaustion often go wrong for two reasons. (1) No matter how closely defined, the physical quantity of a resource in the Earth is not known at any time, because resources are sought and found only as they needed. (2) Even if the physical quantities of particular closely defined natural resources were known, such measurements would not be economically meaning, because we have the capacity to develop additional ways to meet our needs. Thus, the existing "inventory" of natural resources is operationally misleading; physical measurements do not define what we will be able to use as future supplies.
Reserves are but a small part of the resources of any given commodity. Reserves and resources are part of a dynamic system and they cannot be inventoried like cans of tomatoes on a grocer's shelf. New scientific discoveries, new tech, and new commercial demands or restrictions are constantly affecting amounts of reserves and resources. Reserves and resources don't exist until commercial demand puts a value on a material in the market.
Too often we view natural resources as we view the operation of a single copper mine: Dig some ore, and less is left.
There is one resource that has shown a trend of increasing scarcity rather than increasing abundance, human beings. Yes, there are more people on earth now than ever before. But if we measure the scarcity of people the same way that we measure the scarcity of other economic goods--by how much we must pay to obtain their services--we see the wages and salaries have been going up all over the world. This increase in the price of people's services is a clear indication that people are becoming more scarce even though there are more of us.
Material-technical forecasts of resource exhaustion often go wrong for two reasons. (1) No matter how closely defined, the physical quantity of a resource in the Earth is not known at any time, because resources are sought and found only as they needed. (2) Even if the physical quantities of particular closely defined natural resources were known, such measurements would not be economically meaning, because we have the capacity to develop additional ways to meet our needs. Thus, the existing "inventory" of natural resources is operationally misleading; physical measurements do not define what we will be able to use as future supplies.
Reserves are but a small part of the resources of any given commodity. Reserves and resources are part of a dynamic system and they cannot be inventoried like cans of tomatoes on a grocer's shelf. New scientific discoveries, new tech, and new commercial demands or restrictions are constantly affecting amounts of reserves and resources. Reserves and resources don't exist until commercial demand puts a value on a material in the market.
10/29/2012
Scarcity
The appropriate measures of scarcity - the costs of natural resources in human labor, and their
prices relative to wages and to other goods - all suggest that natural resources have been becoming less scarce over the long run,
right up to the present.
The real population problem, then, is not that there are too many people or that too many babies are being born. The problem is that others must support each additional person before that person contributes in turn to the well-being of others.
A baby is a durable good in which someone must invest heavily long before the grown adult begins to provide returns on the investment.
There is an intuitive difference between how we get Hula-Hoops and copper. Copper comes from the earth, whereas a Hula-Hoop does not seem to be a "natural" resource.
Hula-Hoops and dental care and radios seem different from copper because most of the cost of a radio, a Hula-Hoop, or dental care arises from human labor and skill, and only a small part arises from the raw material.
Over the course of history, up to this very moment, copper and other minerals havebeen getting less scarce, rather than more scarce as the depletion theory implies they should.
At the end of this confrontation between theory and fact, we shall be compelled to reject the simple Malthusian depletion theory, and to offer a new theory.The revised theory will suggest that natural resources are not finite in any meaningful economic sense.
Price, together with related measures such as cost of production and share of income, is the appropriate operational test of scarcity at any given moment.
Some people believe that we are now at a long-run turning point, and the past is not a guide to the future. Therefore we ask: How should one judge whether a historical trend is a sound basis for a forecast? Specifically, how can we judge whether the data from the many decades in the past showing declines in raw-material costs are a good basis for prediction? Prediction is always a leap of faith; there is no scientific guarantee that the sun will come up tomorrow. The correctness of an assumption that what happened in the past will similarly happen in the future rests on your wise judgment and knowledge of your subject matter.
A prediction based on past data is sound if it is sensible to assume that the past and the future belong to the same statistical universe, that is, if you can expect conditions that held in the past to remain the same in the future.
The most important elements in raw-material price trends have been (1) the rate of movement from richer to poorer ores and mining locations - that is, the phenomenon of "exhaustion", and (2) the continued development of technology, which has more than made up for exhaustion. Hence if the past differs from the future, the bias islikely to be in the direction of understating the rate at which technology will develop, and therefore underestimating the rate at which costs will fall.
The real population problem, then, is not that there are too many people or that too many babies are being born. The problem is that others must support each additional person before that person contributes in turn to the well-being of others.
A baby is a durable good in which someone must invest heavily long before the grown adult begins to provide returns on the investment.
There is an intuitive difference between how we get Hula-Hoops and copper. Copper comes from the earth, whereas a Hula-Hoop does not seem to be a "natural" resource.
Hula-Hoops and dental care and radios seem different from copper because most of the cost of a radio, a Hula-Hoop, or dental care arises from human labor and skill, and only a small part arises from the raw material.
Over the course of history, up to this very moment, copper and other minerals havebeen getting less scarce, rather than more scarce as the depletion theory implies they should.
At the end of this confrontation between theory and fact, we shall be compelled to reject the simple Malthusian depletion theory, and to offer a new theory.The revised theory will suggest that natural resources are not finite in any meaningful economic sense.
Price, together with related measures such as cost of production and share of income, is the appropriate operational test of scarcity at any given moment.
Some people believe that we are now at a long-run turning point, and the past is not a guide to the future. Therefore we ask: How should one judge whether a historical trend is a sound basis for a forecast? Specifically, how can we judge whether the data from the many decades in the past showing declines in raw-material costs are a good basis for prediction? Prediction is always a leap of faith; there is no scientific guarantee that the sun will come up tomorrow. The correctness of an assumption that what happened in the past will similarly happen in the future rests on your wise judgment and knowledge of your subject matter.
A prediction based on past data is sound if it is sensible to assume that the past and the future belong to the same statistical universe, that is, if you can expect conditions that held in the past to remain the same in the future.
The most important elements in raw-material price trends have been (1) the rate of movement from richer to poorer ores and mining locations - that is, the phenomenon of "exhaustion", and (2) the continued development of technology, which has more than made up for exhaustion. Hence if the past differs from the future, the bias islikely to be in the direction of understating the rate at which technology will develop, and therefore underestimating the rate at which costs will fall.
10/25/2012
What is law
The existence of law means that certain kinds of human conduct are no longer optional, but in some sense obligatory. Obligation is the essence of law. How do law and legal obligation differ from, and how are they related to, orders backed by threats.
Just as a legal system obviously contains elements closely connected with the simple cases of orders backed by threats, so equally obviously it contains elements closely connected with certain aspects of morality.
Law is better understood as a 'branch' of morality or justice and that its congruence with the principles of morality or justice rather than its incorporation of orders and threats is of its 'essence'. But theories that make this close assimilation of law to morality seem, in the end, often to confuse one kind of obligatory conduct with another, and to leave insufficient room for differences in kind between legal and moral rules and for divergences in their requirements.
Both those who have found the key to the understanding of law in the notion of orders backed by threats, and those who have found it in its relation to morality or justice, alike speak of law as containing, if not consisting largely of, rules. But what are rules? What does it mean to say that a rule exists?
It is to say that a rule exists means only that a group of people, or most of them, behave ' as a rule' in a specified similar way in certain kinds of circumstances. But mere convergence in behavior between members of a social group may exist and yet there may be no rule requiring it.
Three recurrent issues:
(1) How does law differ from and how is it related to orders backed by threats?
(2) How does legal obligation differ from, and how is it related to, moral obligation?
(3) What are rules and to what extent is law an affair of rules?
Solve these problems to decipher the 'nature' of the law.
Just as a legal system obviously contains elements closely connected with the simple cases of orders backed by threats, so equally obviously it contains elements closely connected with certain aspects of morality.
Law is better understood as a 'branch' of morality or justice and that its congruence with the principles of morality or justice rather than its incorporation of orders and threats is of its 'essence'. But theories that make this close assimilation of law to morality seem, in the end, often to confuse one kind of obligatory conduct with another, and to leave insufficient room for differences in kind between legal and moral rules and for divergences in their requirements.
Both those who have found the key to the understanding of law in the notion of orders backed by threats, and those who have found it in its relation to morality or justice, alike speak of law as containing, if not consisting largely of, rules. But what are rules? What does it mean to say that a rule exists?
It is to say that a rule exists means only that a group of people, or most of them, behave ' as a rule' in a specified similar way in certain kinds of circumstances. But mere convergence in behavior between members of a social group may exist and yet there may be no rule requiring it.
Three recurrent issues:
(1) How does law differ from and how is it related to orders backed by threats?
(2) How does legal obligation differ from, and how is it related to, moral obligation?
(3) What are rules and to what extent is law an affair of rules?
Solve these problems to decipher the 'nature' of the law.
10/17/2012
State legitmacy
During the 1980s, while the majority of top state elites still believed in the ideological legitimacy of the regime, most students and Beijing residents evaluated the state mainly for its economic and moral performance. In the course of movement, the students challenged the government ideologically and morally, and the larger society sympathized with the challenges. On the other hand, the government either relied on ideological or legal dimensions of state authority to deal with the movement, which only antagonized Beijing students and residents, or made limited concessions, which could not satisfy the radicals. In the end, the only viable alternative appeared to be military repression, on which the government could still rely because most top state elites, a group that included military leaders, had joined the CCP long before the communists came to power and still perceived state power as ideologically legitimate.
10/16/2012
1989
Under imperialist pressure, Chinese intellectuals during the late Qing dynasty and the Republican era persistently sought a strong state that could defend the nation, an action that finally led to the rise of communism. Yet the communist state, the strong sate of which intellectuals had dreamed, became a problem because the state performed less well in economic modernization than it did in implementing political repression. The painful experience of intellectuals during Mao's era pushed them to fight for democracy. Still, the intellectuals themselves also inherited Maoist legacies: the unchecked state power under Mao had frightened Chinese intellectuals and drove them to take democracy as the prerequisite of Chinese modernization; the long-standing Marxist mode of education had given them a utopian vision (a linear worldview and a strong desire for social engineering on a grand scale); Mao's mass mobilization had nourished a populist understanding of democracy; and 30 years of repression and isolation had created an educated class with a great info deficiency and with opportunistic attitudes. All these factors contributed to the dominance of idealism, opportunism and radicalism among Chinese intellectuals, forming an ethos which in turn shaped intellectuals discourses during the 1980s and facilitated the rise of the 1989 movement.
Hua Guofeng's new leap forward (four modernization) required big science and high tech. Thus the roles of intellectuals was greatly emphasized. The mutual reinforcement of state policy and social demands led to a great expansion of higher education. Between 1977 and 1985, both the number of universities and general university enrollment increased rapidly. The greatest increases in enrollment occurred in the social sciences and humanities.
The four modernization proved to be unsustainable. Deng Xiaoping changed the policy, which emphasized the role of market. Chinese students and intellectuals were ambivalent toward this change. Their pro-Western pretensions led them to strongly support the new policy, but they were unhappy about their economic status under it. They thought that a market economy would bring the country prosperity, but they never expected that market forces would also degrade the prestige and privileges that intellectuals in traditional societies had enjoyed. Besides, even though Chinese government put great emphasis on higher education, its increases in funding lagged far behind the growth of enrollment.
Four obvious periods:
(1) 1978-1978 study fever
(2) 1980-1982 studied a less hard than had the Cultural Revolution cohort, but overall enthusiasm for study was still very high
(3) 1983-1986 diploma fever affected by the urban economic reform that had started in 1984
(4) 1987-1988 tired of study
The university in an underdeveloped nation tends to be a foreign institution with few indigenous roots. It teaches a foreign culture and is an engine for forced modernization and against tradition.
While a few radical activists did take democracy as a primary goal, most students participated in the movement in reaction to China's rising market economy. They didn't trust the state and didn't understand the market economy. They believed that the reform would bring intellectuals more benefits, and when it turned out that the opposite was true, they were very angry. To this population, democracy remained more a "borrowed language" than a clearly understood political program.
The decline of political control system had a great impact on the rise of the 1989 movement. The weakening of political control was mainly a result of the declining ideological legitimation of the state and of changing channels of status attainment.
The social problems that had the greatest impact on the Chinese and were most directly related to the rise of the 1989 Movement were rampant corruption, high inflation, and increasing income disparities.
rent-seeking Under the newly introduced dual-track price system for raw materials, state enterprises still received their yearly quota at the lower subsidized prices, but enterprises of other sectors had to buy raw materials at the market price. (Arbitrage chance)
The high inflation was a combined result of the financial deficit, the overheated economy, rampant corruption, price reforms and the decreasing confidence of the general public in the state.
Hua Guofeng's new leap forward (four modernization) required big science and high tech. Thus the roles of intellectuals was greatly emphasized. The mutual reinforcement of state policy and social demands led to a great expansion of higher education. Between 1977 and 1985, both the number of universities and general university enrollment increased rapidly. The greatest increases in enrollment occurred in the social sciences and humanities.
The four modernization proved to be unsustainable. Deng Xiaoping changed the policy, which emphasized the role of market. Chinese students and intellectuals were ambivalent toward this change. Their pro-Western pretensions led them to strongly support the new policy, but they were unhappy about their economic status under it. They thought that a market economy would bring the country prosperity, but they never expected that market forces would also degrade the prestige and privileges that intellectuals in traditional societies had enjoyed. Besides, even though Chinese government put great emphasis on higher education, its increases in funding lagged far behind the growth of enrollment.
Four obvious periods:
(1) 1978-1978 study fever
(2) 1980-1982 studied a less hard than had the Cultural Revolution cohort, but overall enthusiasm for study was still very high
(3) 1983-1986 diploma fever affected by the urban economic reform that had started in 1984
(4) 1987-1988 tired of study
The university in an underdeveloped nation tends to be a foreign institution with few indigenous roots. It teaches a foreign culture and is an engine for forced modernization and against tradition.
While a few radical activists did take democracy as a primary goal, most students participated in the movement in reaction to China's rising market economy. They didn't trust the state and didn't understand the market economy. They believed that the reform would bring intellectuals more benefits, and when it turned out that the opposite was true, they were very angry. To this population, democracy remained more a "borrowed language" than a clearly understood political program.
The decline of political control system had a great impact on the rise of the 1989 movement. The weakening of political control was mainly a result of the declining ideological legitimation of the state and of changing channels of status attainment.
The social problems that had the greatest impact on the Chinese and were most directly related to the rise of the 1989 Movement were rampant corruption, high inflation, and increasing income disparities.
rent-seeking Under the newly introduced dual-track price system for raw materials, state enterprises still received their yearly quota at the lower subsidized prices, but enterprises of other sectors had to buy raw materials at the market price. (Arbitrage chance)
The high inflation was a combined result of the financial deficit, the overheated economy, rampant corruption, price reforms and the decreasing confidence of the general public in the state.
10/13/2012
Property system and what Marx missed
The lifeblood of capitalism is capital.
Today, to a great extent, the difference between advanced nations and the rest of the world is that between countries where formal property is widespread and countries where classes are divided into those who can fix property rights and produce capital and those who cannot.
Marx didn't grasp that formal property was not simply an instrument for appropriation but also the means to motivate people to create real additional usable value. He didn't see that it is the mechanisms contained in the property system itself that give assets the labor invested in them the form required to create capital. Nor was he able to foresee to what degree legal property systems would become crucial vehicles for the enhancement of exchange value.
Marx lived in a time when it was probably too soon to see how formal property could, through representation, make those same resources serve additional functions and produce surplus value. (Though he saw that capital is more a transcendent concept than a physical good) Thus he could not see how it would be in everyone's interest to increase the range of the beneficiaries of property. Property titles were only the visible tip of a growing formal property iceberg. The rest of the iceberg is now an enormous man-made facility for drawing out the economic potential of assets. Potential capital is no longer the privilege of the few. The world is not filled with true proletarians but with extralegal entrepreneurs.
But property systems can also be used for theft. But it is not the reason to ban, just like we would ban automobiles or computers just because some people may use them to commit crimes.
Formal property is more than just ownership. It has to be viewed as an indispensable process that provides people with the tools to focus their thinking on those aspects of their resources from which they can extract capital.
Formal property is more than a system for titling, recording, and mapping assets---it is an instrument of thought, representing assets in such a way that people's minds can work on them to generate surplus value.
The reason why formal property must be universally accessible: to bring everyone into one social contract where they can cooperate to raise society's productivity.
A good property system puts assets into a form that lets us distinguish their similarities, differences, and connecting points with other assets. It collects dispersed information and makes capitals fungible.
The value of things can be increased by reducing the costs of knowing them and transacting with them. (Ronald Coase)
In Plato's famous analogy, we are likened to prisoners chained in a cave with our backs to the entrance so that all we can know of the world are the shadows cast on the wall in front of us. This means that many things that guide our destiny are not self-evident. (Hayek) That is why civilization has worked hard to fashion representational systems to access and grasp the part of our reality that is virtual and to represent it in terms we can understand. (Margaret Boden)
Representational systems such as math and integrated property help us manipulate and order the complexities of the world in a manner that we can all understand and that allows us to communicate regarding issues that we could not otherwise handle. prosthetic extensions of the mind.
Today, to a great extent, the difference between advanced nations and the rest of the world is that between countries where formal property is widespread and countries where classes are divided into those who can fix property rights and produce capital and those who cannot.
Marx didn't grasp that formal property was not simply an instrument for appropriation but also the means to motivate people to create real additional usable value. He didn't see that it is the mechanisms contained in the property system itself that give assets the labor invested in them the form required to create capital. Nor was he able to foresee to what degree legal property systems would become crucial vehicles for the enhancement of exchange value.
Marx lived in a time when it was probably too soon to see how formal property could, through representation, make those same resources serve additional functions and produce surplus value. (Though he saw that capital is more a transcendent concept than a physical good) Thus he could not see how it would be in everyone's interest to increase the range of the beneficiaries of property. Property titles were only the visible tip of a growing formal property iceberg. The rest of the iceberg is now an enormous man-made facility for drawing out the economic potential of assets. Potential capital is no longer the privilege of the few. The world is not filled with true proletarians but with extralegal entrepreneurs.
But property systems can also be used for theft. But it is not the reason to ban, just like we would ban automobiles or computers just because some people may use them to commit crimes.
Formal property is more than just ownership. It has to be viewed as an indispensable process that provides people with the tools to focus their thinking on those aspects of their resources from which they can extract capital.
Formal property is more than a system for titling, recording, and mapping assets---it is an instrument of thought, representing assets in such a way that people's minds can work on them to generate surplus value.
The reason why formal property must be universally accessible: to bring everyone into one social contract where they can cooperate to raise society's productivity.
A good property system puts assets into a form that lets us distinguish their similarities, differences, and connecting points with other assets. It collects dispersed information and makes capitals fungible.
The value of things can be increased by reducing the costs of knowing them and transacting with them. (Ronald Coase)
In Plato's famous analogy, we are likened to prisoners chained in a cave with our backs to the entrance so that all we can know of the world are the shadows cast on the wall in front of us. This means that many things that guide our destiny are not self-evident. (Hayek) That is why civilization has worked hard to fashion representational systems to access and grasp the part of our reality that is virtual and to represent it in terms we can understand. (Margaret Boden)
Representational systems such as math and integrated property help us manipulate and order the complexities of the world in a manner that we can all understand and that allows us to communicate regarding issues that we could not otherwise handle. prosthetic extensions of the mind.
10/11/2012
The mystery of legal failure
The reason that governments worldwide have failed to open up their property systems to the poor is that they usually operate under five basic misconceptions:
(1) all people who take cover in the extralegal or underground sectors do so to avoid paying taxes
(2) real estate assets are not held legally because they have not been properly surveyed, mapped, and recorded
(3) enacting mandatory law on property is sufficient, and gov.t can ignore the costs of compliance with that law
(4) existing extralegal arrangements or "social contracts" can be ignored
(5) you can change sth. as fundamental as people's convention on how they can hold their assets, both legal and extralegal, without high-level political leadership
Most people do not resort to the extralegal sector because it is a tax haven but because existing law does not address their needs or aspirations.
Operating in the underground is hardly cost-free. (basic application of demand-supply curves) Being free from the costs and nuisance of the extralegal sector generally compensates for paying taxes.
The widespread undercapitalization, informal squatting, and illegal housing throughout the non-Western world are hardly caused by a lack of advanced information and mapping technology.
Property is not a primary quality of assets but the legal expression of an economically meaningful consensus about assets and law is the instrument that fixes and realizes capital.
Property is not the assets themselves but a consensus between people as to how those assets should be held, used and exchanged.
Assets themselves have no effect on social behavior: they don't produce incentives, they make no person accountable, no contract enforceable. Assets are not intrinsically "fungible"--capable of being divided, combined, or mobilized to suit any transactions. All of these qualities grow out of modern property law. It is law that detaches and fixes the economic potential of assets as a value separate from the material assets themselves and allows humans to discover and realize that potential. It is law that connects assets into financial and investment circuits. And it is the representation of assets fixed in legal property documents that gives them the power to create surplus value.
(1) all people who take cover in the extralegal or underground sectors do so to avoid paying taxes
(2) real estate assets are not held legally because they have not been properly surveyed, mapped, and recorded
(3) enacting mandatory law on property is sufficient, and gov.t can ignore the costs of compliance with that law
(4) existing extralegal arrangements or "social contracts" can be ignored
(5) you can change sth. as fundamental as people's convention on how they can hold their assets, both legal and extralegal, without high-level political leadership
Most people do not resort to the extralegal sector because it is a tax haven but because existing law does not address their needs or aspirations.
Operating in the underground is hardly cost-free. (basic application of demand-supply curves) Being free from the costs and nuisance of the extralegal sector generally compensates for paying taxes.
The widespread undercapitalization, informal squatting, and illegal housing throughout the non-Western world are hardly caused by a lack of advanced information and mapping technology.
Property is not a primary quality of assets but the legal expression of an economically meaningful consensus about assets and law is the instrument that fixes and realizes capital.
Property is not the assets themselves but a consensus between people as to how those assets should be held, used and exchanged.
Assets themselves have no effect on social behavior: they don't produce incentives, they make no person accountable, no contract enforceable. Assets are not intrinsically "fungible"--capable of being divided, combined, or mobilized to suit any transactions. All of these qualities grow out of modern property law. It is law that detaches and fixes the economic potential of assets as a value separate from the material assets themselves and allows humans to discover and realize that potential. It is law that connects assets into financial and investment circuits. And it is the representation of assets fixed in legal property documents that gives them the power to create surplus value.
The missing lesson of U.S. history
The transition to integrated legal property system had little to do with technology; instead, the crucial change had to do with adapting the law to the social and economic needs of the majority of the population.
The mystery of political awareness
For better or for worse, people outside the West are fleeing self-sufficient and isolated societies in an effort to raise their standards of living by becoming interdependent in much larger markets. A legal failure that prevents enterprising people from negotiating with strangers defeats the division of labor and fastens would-be entrepreneurs to smaller circles of specialization and low productivity.
Property obeys what is known as Metcalfe's law: the value of network is roughly proportional to the number of users squared.
Many of the problems of non-Western markets today are due mainly to the fragmentation of their property arrangements and the unavailability of standard norms that allow assets and economic agents to interact and government to rule by law.
Political blindness consists of being unaware that the growth of the extralegal sector and the breakdown of the existing legal order are ultimately due to a gigantic movement away from life organized on a small scale toward one organized in a larger context.
The existence of prosperous enclaves in a sea of poverty conceals an abysmal retardation in a nation's capacity to create, respect and make available formal property rights to the majority of its citizens.
Throughout the Third World, extralegal activities burgeon whenever the legal system imposes rules that thwart the expectation of those it excludes.
Property obeys what is known as Metcalfe's law: the value of network is roughly proportional to the number of users squared.
Many of the problems of non-Western markets today are due mainly to the fragmentation of their property arrangements and the unavailability of standard norms that allow assets and economic agents to interact and government to rule by law.
Political blindness consists of being unaware that the growth of the extralegal sector and the breakdown of the existing legal order are ultimately due to a gigantic movement away from life organized on a small scale toward one organized in a larger context.
The existence of prosperous enclaves in a sea of poverty conceals an abysmal retardation in a nation's capacity to create, respect and make available formal property rights to the majority of its citizens.
Throughout the Third World, extralegal activities burgeon whenever the legal system imposes rules that thwart the expectation of those it excludes.
10/07/2012
The mystery of capital
Dead capital exists because we have already forgotten that converting a physical asset to generate capital requires a very complex process.
Why assets can be made to produce abundant capital in the West but very little in the rest of the world is a mystery.
In medieval Latin, "capital" appears to have denoted head of cattle or other livestock, which have always been important sources of wealth beyond the basic meat they provide.
The term "capital" does two jobs simultaneously: capture the physical dimension of assets (livestock) and their potential to generate surplus value (mike, hides, meat, fuel and reproduction)
Modern definition: part of a country's assets that initiates surplus production and increases productivity.
For accumulated assets to become active capital and put additional production in motion, they must be fixed and realized in some particular subject which lasts or some time at least after that labor is past.
Capital is not the accumulated stock of assets but the potential it holds to deploy new production. Creating capital also requires a conversion process.
Capital is first an abstract concept and must be given a fixed, tangible form to be useful.
The additional value people obtain from the resources is not a value of the resources themselves, but rather a value of the man-made process entrinsic to the resources.
Bringing capital to life requires us to go beyond looking at our assets as they are to actively thinking about them as they could be.
What creates capital in the West is an implicit process buried in the intricates of its formal property systems.---The formal property system
Any asset whose economic and social aspects are not fixed in a formal property system is extremely hard to move in the market.
The formal property systems produce six effects that allow citizens to generate capital.
(1) fixing the economic potential of assets
property is not the stuff itself but an economic concept about the stuff, embodied in a legal representation
(2) integrate dispersed information into one system
The integration of all property systems under one formal property law shifted the legitimacy of the rights of owners from the politized context of local communities to the impersonal context law.
(3) make people accountable
Freed from primitive econ activities and burdensome parochial constraints, citizens could explore how to generate surplus value from their own assets. People lose anonymity in the system.
Formal property's role in protecting not only ownership but the security of transactions encourages citizens in advanced countries to respect titles, honor contracts, and obey the law.
(4) make assets fungible
Why assets can be made to produce abundant capital in the West but very little in the rest of the world is a mystery.
In medieval Latin, "capital" appears to have denoted head of cattle or other livestock, which have always been important sources of wealth beyond the basic meat they provide.
The term "capital" does two jobs simultaneously: capture the physical dimension of assets (livestock) and their potential to generate surplus value (mike, hides, meat, fuel and reproduction)
Modern definition: part of a country's assets that initiates surplus production and increases productivity.
For accumulated assets to become active capital and put additional production in motion, they must be fixed and realized in some particular subject which lasts or some time at least after that labor is past.
Capital is not the accumulated stock of assets but the potential it holds to deploy new production. Creating capital also requires a conversion process.
Capital is first an abstract concept and must be given a fixed, tangible form to be useful.
The additional value people obtain from the resources is not a value of the resources themselves, but rather a value of the man-made process entrinsic to the resources.
Bringing capital to life requires us to go beyond looking at our assets as they are to actively thinking about them as they could be.
What creates capital in the West is an implicit process buried in the intricates of its formal property systems.---The formal property system
Any asset whose economic and social aspects are not fixed in a formal property system is extremely hard to move in the market.
The formal property systems produce six effects that allow citizens to generate capital.
(1) fixing the economic potential of assets
property is not the stuff itself but an economic concept about the stuff, embodied in a legal representation
(2) integrate dispersed information into one system
The integration of all property systems under one formal property law shifted the legitimacy of the rights of owners from the politized context of local communities to the impersonal context law.
(3) make people accountable
Freed from primitive econ activities and burdensome parochial constraints, citizens could explore how to generate surplus value from their own assets. People lose anonymity in the system.
Formal property's role in protecting not only ownership but the security of transactions encourages citizens in advanced countries to respect titles, honor contracts, and obey the law.
(4) make assets fungible
10/06/2012
Capitalism with Chinese characteristics
China is a crony capitalism built on systemic corruption and raw political power.
Property rights are not secure, a politically connected entrepreneur, with the full backing of the coercive power of the state, could simply expropriate the value from ordinary people.
4 kinds of capitalism:
(1) state-guided capitalism: government sets industrial policies and directs investment
(2) oligarchic capitalism: empowers and enriches the few at the expense of the many
(3) big-firm capitalism: accentuates the dominance of big firms and suppress innovation
(4) entrepreneurial capitalism: small and innovative businesses drive growth
On the surface, it does not seem to matter whether Chinese capitalism is entrepreneurial or state-led.
But it does matter:
(1) social opp--arrangements for health care and education--contracted during the fast GDP growth period of the 1990s.Rising illiteracy is probably the most monumental legacy of the policy model of the 1990s.
(2) personal income per capita grow much more slowly than GDP per capita
(3) it is well established that China today is among the most unequal societies in the world. Certain groups or individuals are privileged over others to grab a larger share of the economic gains.
Property rights are not secure, a politically connected entrepreneur, with the full backing of the coercive power of the state, could simply expropriate the value from ordinary people.
4 kinds of capitalism:
(1) state-guided capitalism: government sets industrial policies and directs investment
(2) oligarchic capitalism: empowers and enriches the few at the expense of the many
(3) big-firm capitalism: accentuates the dominance of big firms and suppress innovation
(4) entrepreneurial capitalism: small and innovative businesses drive growth
On the surface, it does not seem to matter whether Chinese capitalism is entrepreneurial or state-led.
But it does matter:
(1) social opp--arrangements for health care and education--contracted during the fast GDP growth period of the 1990s.Rising illiteracy is probably the most monumental legacy of the policy model of the 1990s.
(2) personal income per capita grow much more slowly than GDP per capita
(3) it is well established that China today is among the most unequal societies in the world. Certain groups or individuals are privileged over others to grab a larger share of the economic gains.
What's wrong with Shanghai?
The story of Shanghai is of two extreme. At one extreme, Shanghai is viewed as a model of economic development and as a symbol of a rising and prosperous China. At the other extreme, there is virtually no real knowledge about this city.
Much of the admiration for Shanghai is based on visual evidence. Although it is true that Shanghai has had excellent GDP performance, much of this performance seems to have only moderately improved the living standards of the average Shanghainese. A huge portion of Shanghai's GDP accrues not to Shanghai's households as personal income but rather to the government in the form of taxes and to corporations in the form of profits. Corporations in Shanghai are either heavily controlled by the government or their control rights are shared with foreign investments. The exalted GDP numbers translate into only modest levels of household income in Shanghai.
In the 1990s, Shanghai's GDP growth was not pro-poor and since the late 1990s, its growth has been sharply anti-poor.Whereas Shanghai households enjoy the highest wage level in the country, they earn very little money from their asset ownership.
There is no hard evidence that Shanghai is innovative. Despite a rich history of business creation and risk-taking, entrepreneurship is almost completely missing in Shanghai today.
Shanghai is rich but an average Shanghainese is not. A huge share of the economic gains go to the government and the state-controlled businesses. In 1980s, when Shanghai's GDP per capita declined against the rest of the country, the income of its average residents was actually gaining, and this was especially true for its rural residents. A state-controlled economy can grow without improving the economic well-being of its average residents.
Shanghai's per capita property income is very low (the sources of property income are comprised of interest and dividend payouts or income from property rentals)
Many observers believe that Shanghai experienced a Renaissance in the 1990s, but the truth is that for Shanghai's average households, the massive growth brought about very little in wealth creation.
The incomes from interest and dividend payouts represent the incomes derived from the savings set aside by households in previous years. That Shanghai's property income is so low indicates that there is a very low savings rate.
The growth in joblessness took an extreme form in Shanghai. In the 1990s, not only did employment grow at a slower rate than GDP, the size of employment actually contracted.
Shanghai started out as a leader in patents in the 1980s but ended as a laggard in the 1990s. Shanghai was showered with resources from the central government.
The Shanghai model has four integral components.
(1) a highly interventionist state
(2) a systematic and deep anti-rural bias in its economic policies
(3) a biased liberalization in favor of foreign capitalists at the expense of indigenous capitalists
(4) Shanghai is favored by the central government and might have been showered with massive resources
The Shanghai model, formulated in the last five years of the 1980s, was a precursor to China's anti-rural bias and repression of small-scale and labor-intensive entrepreneurship in the 1990s. The Pudong project, which in its essence ks built on a massive taking of land from rural incumbents, has had a powerful demonstration effect and was widely emulated in the rest of China beginning in the late 1990s. The Pudong model contributed to rising land grabs in China as many local governments sought to create their own versions of urban miracles. The tactics include forcible evictions of long-term residents, large-scale demolitions of existing housing stock, collusions with corrupt real estate developers, and below-the-market-price land requisitions.
Because of its privileged position in Chinese politics in the 1990s, Shanghai was able to amass a huge amount of financial resources supplied from the rest of the country.
In the 1990s, as the Chinese central state was investing heavily in a few urban metropolis such as Shanghai and Beijing, the same central government under-funded rural health and education.
Shanghai is the quintessential state-led capitalism.
Much of the admiration for Shanghai is based on visual evidence. Although it is true that Shanghai has had excellent GDP performance, much of this performance seems to have only moderately improved the living standards of the average Shanghainese. A huge portion of Shanghai's GDP accrues not to Shanghai's households as personal income but rather to the government in the form of taxes and to corporations in the form of profits. Corporations in Shanghai are either heavily controlled by the government or their control rights are shared with foreign investments. The exalted GDP numbers translate into only modest levels of household income in Shanghai.
In the 1990s, Shanghai's GDP growth was not pro-poor and since the late 1990s, its growth has been sharply anti-poor.Whereas Shanghai households enjoy the highest wage level in the country, they earn very little money from their asset ownership.
There is no hard evidence that Shanghai is innovative. Despite a rich history of business creation and risk-taking, entrepreneurship is almost completely missing in Shanghai today.
Shanghai is rich but an average Shanghainese is not. A huge share of the economic gains go to the government and the state-controlled businesses. In 1980s, when Shanghai's GDP per capita declined against the rest of the country, the income of its average residents was actually gaining, and this was especially true for its rural residents. A state-controlled economy can grow without improving the economic well-being of its average residents.
Shanghai's per capita property income is very low (the sources of property income are comprised of interest and dividend payouts or income from property rentals)
Many observers believe that Shanghai experienced a Renaissance in the 1990s, but the truth is that for Shanghai's average households, the massive growth brought about very little in wealth creation.
The incomes from interest and dividend payouts represent the incomes derived from the savings set aside by households in previous years. That Shanghai's property income is so low indicates that there is a very low savings rate.
The growth in joblessness took an extreme form in Shanghai. In the 1990s, not only did employment grow at a slower rate than GDP, the size of employment actually contracted.
Shanghai started out as a leader in patents in the 1980s but ended as a laggard in the 1990s. Shanghai was showered with resources from the central government.
The Shanghai model has four integral components.
(1) a highly interventionist state
(2) a systematic and deep anti-rural bias in its economic policies
(3) a biased liberalization in favor of foreign capitalists at the expense of indigenous capitalists
(4) Shanghai is favored by the central government and might have been showered with massive resources
The Shanghai model, formulated in the last five years of the 1980s, was a precursor to China's anti-rural bias and repression of small-scale and labor-intensive entrepreneurship in the 1990s. The Pudong project, which in its essence ks built on a massive taking of land from rural incumbents, has had a powerful demonstration effect and was widely emulated in the rest of China beginning in the late 1990s. The Pudong model contributed to rising land grabs in China as many local governments sought to create their own versions of urban miracles. The tactics include forcible evictions of long-term residents, large-scale demolitions of existing housing stock, collusions with corrupt real estate developers, and below-the-market-price land requisitions.
Because of its privileged position in Chinese politics in the 1990s, Shanghai was able to amass a huge amount of financial resources supplied from the rest of the country.
In the 1990s, as the Chinese central state was investing heavily in a few urban metropolis such as Shanghai and Beijing, the same central government under-funded rural health and education.
Shanghai is the quintessential state-led capitalism.
10/05/2012
A great reversal
Politically, the post-Tiananmen conservative leadership mounted a nationwide crackdown on China's private sector. The prevailing economic policy in the 1990s was to favor the urban areas over the rural areas and to favor foreign capitalists--FDI--over indigenous capitalists.\
Fittingly, 1989 marked both the decadal and policy turning points.
In the 1990s, China reversed many of its productive policies of the 1980s, with real consequences.
The barriers to entry or to expansion of rural entrepreneurship increased profits to incumbent businesses, thus explaining why non-farm business income increased in the 1990s.
The TVEs succeeded in the 1980s and failed in the 1990s for exactly the same reason--- that they were substantially private. It was the national policy environment that changed between the two decades.
Fittingly, 1989 marked both the decadal and policy turning points.
In the 1990s, China reversed many of its productive policies of the 1980s, with real consequences.
The barriers to entry or to expansion of rural entrepreneurship increased profits to incumbent businesses, thus explaining why non-farm business income increased in the 1990s.
The TVEs succeeded in the 1980s and failed in the 1990s for exactly the same reason--- that they were substantially private. It was the national policy environment that changed between the two decades.
10/04/2012
Renewable resources
Renewable sources of energy are not green and the nuclear industry should make a product beside electricity.
A few decades ago, some visionaries dreamed of an all-electric society. Today people convert about 35–40% of all primary fuel to electricity. The fraction will rise, but now even electricity enthusiasts (as I am) accept that finally not much more than half of all energy is likely to be electrified. Reasons include the impracticality of a generating system geared entirely to the instant consumption of energy and lack of amenability of many vehicles to reliance on electricity. Surrendering the vision of an all-electric society is a minor nuclear heresy.
In the USA and much of the rest of the world, including Canada, renewables mean dammed rivers. Almost 80% of so-called US renewable energy is hydro, and hydro generates about 60% of all Canada’s electricity.
The demand for electricity varies widely from hour to hour, day to day, and month to month. Electricity demand is typically highest during the daytime hours and lowest at night. It tends to be very high on unusually hot or unusually cold days and is lowest at night on mild spring and fall days. Demand typically reaches its highest levels during only a few hours each year. There is also a minimum “base” aggregate demand that is sustained through the entire year.
Electricity is the ultimate “just in time” manufacturing process, where supply must be produced to meet demand in real time.
A few decades ago, some visionaries dreamed of an all-electric society. Today people convert about 35–40% of all primary fuel to electricity. The fraction will rise, but now even electricity enthusiasts (as I am) accept that finally not much more than half of all energy is likely to be electrified. Reasons include the impracticality of a generating system geared entirely to the instant consumption of energy and lack of amenability of many vehicles to reliance on electricity. Surrendering the vision of an all-electric society is a minor nuclear heresy.
In the USA and much of the rest of the world, including Canada, renewables mean dammed rivers. Almost 80% of so-called US renewable energy is hydro, and hydro generates about 60% of all Canada’s electricity.
The demand for electricity varies widely from hour to hour, day to day, and month to month. Electricity demand is typically highest during the daytime hours and lowest at night. It tends to be very high on unusually hot or unusually cold days and is lowest at night on mild spring and fall days. Demand typically reaches its highest levels during only a few hours each year. There is also a minimum “base” aggregate demand that is sustained through the entire year.
Electricity is the ultimate “just in time” manufacturing process, where supply must be produced to meet demand in real time.
10/02/2012
The entrepreneurial decade
China in the 1980s witnessed an explosion of indigenous, completely private entrepreneurship, but almost all of this entrepreneurship occurred in the rural areas of the country. It was not an agricultural phenomenon.
Township and village enterprises spearheaded China's massive rural industrialization.
In the 1980s, Chinese peasants experienced the most rapid income gains in history. Per capita rural income between 1978 and 1981 grew at a real rate of 11.4 percent, the urban/rural ratio of the purchase of consumer goods fell from 10 to 1 in 1978 to 6 to 1 in 1981. According to a rural survey, rural per capita income more than doubled between 1978 and 1984, and real rural per capita consumption increased by 51percent between 1978 and 1983.
The consensus view is that rural reforms accounted for the largest segment of the income gains.
Chinese capitalism is heavily rural in origin. Rural entrepreneurship was also virtuous because it emerged first and developed fastest in the poorest regions of China.
Many of the largest manufacturing private-sector firms hail from backward, predominantly agricultural provinces of China.
The Cultural Revolution might have laid the foundation for the post-reform takeoff of rural entrepreneurship.
In the 1980s, there were two cross-cutting dynamics in the income distribution trends. One was a rise of within-rural inequality; the other was a decrease in rural/urban inequality.
Township and village governments assumed controls of private firms as a matter of political prerogative rather than on the basis of their share of capital contributions. In 1980s, China did not have a legal framework to accommodate large-size private firms. The logic of township control had nothing to do with economics; it was deeply political.
The very reason for the failure of township and village enterprise is that the business environment for rural entrepreneurship turned dramatically adverse in the 1990s.
Are TVEs really public?
The TVE label owes its origins to the commune and brigade enterprises created during the Great Leap Forward. But the cast majority of TVEs had nothing to do with the Great Leap Forward. Instead, they completely new entrants during the first half of the 1980s.
Enterprises sponsored by townships and villages are the collective TVEs. The rest of the firms under the TVE label are all private businesses or entities.
In general, the developed parts of China were more state-owned.
The initial triggers of growth can often be "humble" in nature. These reforms amount to nothing more than some relaxation of existing constraints on the private sector. No fundamental institutional reforms--those aiming at property rights protection, for example-- are needed.
Property rights protection in China, now or in 1980s, is very poor, but relative to the Cultural Revolution period, the marginal improvement was huge. Directional liberalism was the source of Chinese incentive to go into entrepreneurship. (Directional liberalism describes the idea of an economy that lacks many key features of liberal capitalism, but is nevertheless moving in that direction with sufficient speed to reassure investors that they’ll be able to keep their gains.)
The price of directional liberalization: property rights is not institutionalized.
Township and village enterprises spearheaded China's massive rural industrialization.
In the 1980s, Chinese peasants experienced the most rapid income gains in history. Per capita rural income between 1978 and 1981 grew at a real rate of 11.4 percent, the urban/rural ratio of the purchase of consumer goods fell from 10 to 1 in 1978 to 6 to 1 in 1981. According to a rural survey, rural per capita income more than doubled between 1978 and 1984, and real rural per capita consumption increased by 51percent between 1978 and 1983.
The consensus view is that rural reforms accounted for the largest segment of the income gains.
Chinese capitalism is heavily rural in origin. Rural entrepreneurship was also virtuous because it emerged first and developed fastest in the poorest regions of China.
Many of the largest manufacturing private-sector firms hail from backward, predominantly agricultural provinces of China.
The Cultural Revolution might have laid the foundation for the post-reform takeoff of rural entrepreneurship.
In the 1980s, there were two cross-cutting dynamics in the income distribution trends. One was a rise of within-rural inequality; the other was a decrease in rural/urban inequality.
Township and village governments assumed controls of private firms as a matter of political prerogative rather than on the basis of their share of capital contributions. In 1980s, China did not have a legal framework to accommodate large-size private firms. The logic of township control had nothing to do with economics; it was deeply political.
The very reason for the failure of township and village enterprise is that the business environment for rural entrepreneurship turned dramatically adverse in the 1990s.
Are TVEs really public?
The TVE label owes its origins to the commune and brigade enterprises created during the Great Leap Forward. But the cast majority of TVEs had nothing to do with the Great Leap Forward. Instead, they completely new entrants during the first half of the 1980s.
Enterprises sponsored by townships and villages are the collective TVEs. The rest of the firms under the TVE label are all private businesses or entities.
In general, the developed parts of China were more state-owned.
The initial triggers of growth can often be "humble" in nature. These reforms amount to nothing more than some relaxation of existing constraints on the private sector. No fundamental institutional reforms--those aiming at property rights protection, for example-- are needed.
Property rights protection in China, now or in 1980s, is very poor, but relative to the Cultural Revolution period, the marginal improvement was huge. Directional liberalism was the source of Chinese incentive to go into entrepreneurship. (Directional liberalism describes the idea of an economy that lacks many key features of liberal capitalism, but is nevertheless moving in that direction with sufficient speed to reassure investors that they’ll be able to keep their gains.)
The price of directional liberalization: property rights is not institutionalized.
Sports market outcomes: leagues, team location, expansion, and negotiations
Leagues enable owners to pursue economic goals and objectives that they cannot pursue as successfully acting alone, such as setting a season schedule, organizing championships, and implementing rule changes.
Single-entity cooperation defines the actions that owners must take to make league play happen in the first place.
(1) setting the schedule: Balanced scheduling, home and away, is essential to the success of the league. Leagues need to act in their single-entity capacity to include all teams in the schedule. To generate widespread fan interest and league growth, stronger teams must play weaker teams as well as other strong teams in order to cultivate broad fan interest.
Another important element is the season length.
(2) Setting the rules: Rules are changed to attract fans.
(3) Cooperation and championships: Determining a champion is very economically valuable. Adding playoffs does 2 things: it extends the season and fan interest for a few teams; it reduces the returns to buying talent.
Joint venture cooperation: The economics of league behavior
Once owners act together in pro leagues to set the stage for competition on the field, they may also act together to raise profits for member owners. All cooperative actions that do not make play happen are called joint ventures. In a joint venture, all owners in the league surrender part of their autonomy to allow the league to act on their behalf. Joint ventures are cooperative acts aimed at increasing profits relative to acting individually.
(1) The definition and protection of individual owner territory. The league is allowed through franchise agreements (a contract between the league and an owner that clearly specifies what it means to own a pro sports team) to define a territory and ensure that no other members locate within that territory.
This managed absence of substitutes allows individual teams to maximize profits as monopolies in their sport in their territory.
(2) Quantity restrictions: 2 indicators
a. rival leagues do form occasionally, indicating that the previous league size was too small in the eyes of the fans of the rival league
b. every time a league announces that it plans to expand, a long line of candidate-owners forms in the hope of becoming the newest addition to a league.
,
Single-entity cooperation defines the actions that owners must take to make league play happen in the first place.
(1) setting the schedule: Balanced scheduling, home and away, is essential to the success of the league. Leagues need to act in their single-entity capacity to include all teams in the schedule. To generate widespread fan interest and league growth, stronger teams must play weaker teams as well as other strong teams in order to cultivate broad fan interest.
Another important element is the season length.
(2) Setting the rules: Rules are changed to attract fans.
(3) Cooperation and championships: Determining a champion is very economically valuable. Adding playoffs does 2 things: it extends the season and fan interest for a few teams; it reduces the returns to buying talent.
Joint venture cooperation: The economics of league behavior
Once owners act together in pro leagues to set the stage for competition on the field, they may also act together to raise profits for member owners. All cooperative actions that do not make play happen are called joint ventures. In a joint venture, all owners in the league surrender part of their autonomy to allow the league to act on their behalf. Joint ventures are cooperative acts aimed at increasing profits relative to acting individually.
(1) The definition and protection of individual owner territory. The league is allowed through franchise agreements (a contract between the league and an owner that clearly specifies what it means to own a pro sports team) to define a territory and ensure that no other members locate within that territory.
This managed absence of substitutes allows individual teams to maximize profits as monopolies in their sport in their territory.
(2) Quantity restrictions: 2 indicators
a. rival leagues do form occasionally, indicating that the previous league size was too small in the eyes of the fans of the rival league
b. every time a league announces that it plans to expand, a long line of candidate-owners forms in the hope of becoming the newest addition to a league.
,
Team cost, profit and winning
Under the profit maximization hypothesis, owners make decisions about their venues, players, and media contracts in order to maximize the difference between total revenues and total costs.
In the short run, elements of the team production are fixed. This includes anything covered by contractual obligation in force during production. For sports teams, the primary fixed inputs are talent, on and off the field, and the facility in which team plays. To clarify, if any of the resources used to produce winning are fixed, the owner is in short-run situation. Whenever all elements of the process are variable, then the long run is under consideration.
The essence of the short run is that some decisions about putting winning in front of fans have already made.
Short run total costs= total fixed costs + total variable costs
Better teams will have a higher total fixed costs because they will choose to put together a more expensive set of player during a given season. Total variable costs might rise at a decreasing rate over some low range of output, but once diminishing returns set in, total variable costs must begin to increase at an increasing rate.
Long-run total cost is the relationship between winning percent and the cost of obtaining it.
Long-run total costs are simply the sum of the player costs(salaries) as more stars are added and winning percent increases. It is the cost of winning percent that the team owner seeks to find.
As teams choose higher winning percents, in the long run total costs rise. Tension between winning and costs. The more an owner wants to win, the more it is going to cost.
In the long run, if costs eventually rise faster than revenues, then profit maximization constrains owners in their pursuit of winning.
Profit variation can harm balance.
The competitive imbalance doesn't necessarily mean that small market teams are not profitable.
Profit-maximizing owners will beef up on talent if they believe that doing so will raise revenues at a greater rate than the costs of making it happen. Only if the last owner made horrible mistakes or has the same vision as the new ownership but no money should we expect the new owner to alter the level of team quality.
In the short run, elements of the team production are fixed. This includes anything covered by contractual obligation in force during production. For sports teams, the primary fixed inputs are talent, on and off the field, and the facility in which team plays. To clarify, if any of the resources used to produce winning are fixed, the owner is in short-run situation. Whenever all elements of the process are variable, then the long run is under consideration.
The essence of the short run is that some decisions about putting winning in front of fans have already made.
Short run total costs= total fixed costs + total variable costs
Better teams will have a higher total fixed costs because they will choose to put together a more expensive set of player during a given season. Total variable costs might rise at a decreasing rate over some low range of output, but once diminishing returns set in, total variable costs must begin to increase at an increasing rate.
Long-run total cost is the relationship between winning percent and the cost of obtaining it.
Long-run total costs are simply the sum of the player costs(salaries) as more stars are added and winning percent increases. It is the cost of winning percent that the team owner seeks to find.
As teams choose higher winning percents, in the long run total costs rise. Tension between winning and costs. The more an owner wants to win, the more it is going to cost.
In the long run, if costs eventually rise faster than revenues, then profit maximization constrains owners in their pursuit of winning.
Profit variation can harm balance.
The competitive imbalance doesn't necessarily mean that small market teams are not profitable.
Profit-maximizing owners will beef up on talent if they believe that doing so will raise revenues at a greater rate than the costs of making it happen. Only if the last owner made horrible mistakes or has the same vision as the new ownership but no money should we expect the new owner to alter the level of team quality.
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