Monday, December 03, 2007

Big Oil is... not who you think..

Big Oil, that pejorative used by today's politicians to refer to large petroleum companies such as ExxonMobil and Royal Dutch Shell, needs an overhaul. While our politicians today continue to point fingers at private oil companies as an example of capitalism run amok and the source of significant global disruption, from global warming, to price gouging to globalization, a new specter has been rising.

Diana Hsieh over at Noodlefood had a nice post showing where the majority of the worlds oil reserves are located. The follow-on implication to that is that today, the bulk of the world's oil is controlled by state-owned companies. 16 of the 20 largest oil companies are state-owned. They control over 90% of the worlds oil reserves. In the mid-20th century, the Seven Sisters that made up Big Oil were all private. With the advent of nationalization of many of the developing worlds oil fields, and the rise of state owned petroleum companies, the new Seven Sisters (as named by the Financial Times). They are, in order of prominence: Saudi Aramco (Saudi Arabia), JSC Gazprom (Russia), CNPC (China), NIOC (Iran), PDVSA (Venezuela), Petrobras (Brazil), Petronas (Malaysia). Saudi, Russia, China, Iran, Venezuela; this is not a list of freedom-loving countries, and it is no accident that totalitarian regimes hold power in each. Aramco, by far the largest of these, by itself produces 5-6 times more oil than either BP, Shell, or ExxonMobil. And it has some of the lowest production costs of any oil producing venture, probably in the single digit $/barrel. That means it pockets over $90 of every barrel sold (at today's prices), where private companies don't make nearly that much money. Compared to the multi-national private companies, these state-owned firms are behemoths.

That much money serves as the national bottomless well in many of these countries, and it is what funds their statist ambitions. With the nations so well-endowed with resources, the negative effects of their totalitarian regimes are masked and, as in the case of Saudi Arabia, the country is able to prosper in spite of the politics driving it. Leaders are able to effectively buy their population's passivity.

The basic requirements of capitalism; long term planning, re-investment of resources, and expansion will ultimately be the undoing of these statist regimes. It already shows. Only three of the new Sisters has become a global players, the rest confined to their home fields as their surplus assets are siphoned off. But the downfall of these regimes will not come for a long time, and the threat they pose until that time is great.

While our politicians still hound Big Oil, they fail to see the rising threat and prefer to continue to hobble our own industry with extra gas taxes, environmental regulations, supposed price-gouging restrictions, restrictions on oil futures markets, and drilling restrictions. The answer is laissez faire; free up our own oil industry to compete aggressively; and defend the rights of private oil companies when bullied by the nations who deal with them.

Friday, November 09, 2007

Out of the archives

 I was perusing my blog notebook where I keep all manner of ideas for posts, and happened upon an old summary I had done when I was reading Robert Bork's Slouching Towards Gomorrah several years ago. Many of the posts I've done recently have looked at the idiocy of so-called conservative policies in an attempt to demonstrate that while the Democrats are no friends of Objectivism, neither are the Republicans. And they may actually be more dangerous to the cause than the Democrats.

What struck me about this essay was that it was all before the last elections, before Leonard Peikoff has convinced me that the Republicans and more importantly, their social/religious conservative base were as dangerous if not more dangerous than today's liberals. And yet, here was the same fundamental analysis which I'd put down on paper long before I understood the consequences of it enough to take action with conviction. The second thing that drew me to it was that here in Bork's thinking, published more than 10 years ago were the basic philosophic ideas clearly articulated that if perpetuated by the Republican party will make it a dangerous threat to liberty. So I transcribed it just out of sense of discovery...

2/7/04 - One of the things that has bothered me about most thought labeled as "conservative" is that while it has a tendency toward advocating more (though not consistent) free market policy and less socialistic policy, it seems to want to replace social policy with a more paternalistic, moralistic use of government. Interestingly enough, Robert Bork in his book Slouching Towards Gomorrah espouses just such a philosophical view on more philosophical grounds. I can clearly see the influence of his ideas and those like him on today's conservative thought...

Bork's thesis is that modern liberalism has "over-extended" two ideas: individualism and egalitarianism into mutated forms which he calls "radical". That the founders never intended and which are incompatible with a free society. He then claims that today's conservative thought represents "true" classical liberalism and that we must return to a more moderate form of these in order to survive as a culture. He then goes on to give examples of today's social and cultural decline and ascribes them to the two trends above.

In English, he claims that today's liberals use government (and change culture) to a) force equality, and b) not morality. Borks solution then is to a) stop forcing equality and b) start forcing morality [sic!]. It is Bork's second action that I have a significant problem with.

I believe that the big issue is in the intrinsic-subjective dichotomy, and that Bork's thesis is a crystal-clear example of intrinsicism run amok to the liberals subjectivism run amok. Today's liberals claim no morality is correct and want society to dictate equality in it's absence. Today's conservatives see one morality from God, but because it is arbitrary and absolute, (and divorced from reality) necessitates the force of it on society.  Both views result in unnecessary force on society. The liberal's claim to it is bankrupt (and Bork rightly exposes it) but Bork's claim is equally wrong.

Which is more dangerous, a bankrupt ideology, or one that is gaining strength in the wake of today's religious fundamentalist movement?

Wednesday, November 07, 2007

The Biofuel Boondoggle

A great article in yesterday's Wall Street Journal highlighting more aspects of the idiocy of biofuels (e.g. biodiesel, and ethanol). From "Biofuel Costs Hurt Effort to Curb Oil Price" it seems that the costs of biofuel feedstocks, namely corn and oils such as palm oil are increasing with the increased demand for these products, preventing them from achieving cost-effectiveness in the face of rising crude oil prices.

A few years ago, many energy economists predicted that higher oil prices would ensure the success of alternative energies such as biodiesel or wind power by making them more financially attractive. In many cases, though, the opposite has occurred: Even as crude-oil prices approach $100 a barrel, some alternatives look less attractive than in the past.

One reason: Energy demand is now so intense that supplies of just about every kind of fuel are in short supply, driving up prices of the raw materials involved in making many alternative energies. Some biofuels also rely on agricultural commodities that already are facing higher demand as foodstuffs, a situation which drives up prices further.

Hmm, who'd have though that the price of corn would go up. Oh, wait, we forgot about a little thing called supply and demand. Not only that, but these feedstocks are commodities, meaning small changes in demand past the total industry supply capacity result in big changes upward in pricing (known as it's price elasticity). Biodiesel accounts for less than 1% of transportation-based fuel supply and already it's causing supply demand and pricing upset in the agricultural sector. Which also means the price of foodstuffs containing corn is going up as well.

What does this mean? Simple, the biofuels sector will stall. It will do so before it ever gets the levels of contribution predicted. Already, plants that were on the drawing boards are not getting built and government subsidies which are what made the entire sector even marginally attractive in the first place will dry up.

In Malaysia, an important center for palm-oil biodiesel production, the government has held back on plans to require biodiesel blends at petrol stations because of a fear it could drive palm-oil prices too high, imperiling the country's nascent biodiesel industry.

Malaysia issued roughly 90 permits for biodiesel refineries in the past three years, but only about five are in operation. It appears that most of the others will remain on hold until palm-oil prices come back down.

In Europe, officials are still committed to a plan to meet 10% of the region's transportation needs with biofuels by 2020. But Germany has cut back on some tax incentives for biofuels, and some EU officials have questioned whether subsidies for biofuel crops are necessary in the future. Spanish energy company Abengoa SA recently suspended production at one of its biofuel facilities in Spain because of high grain prices. Similar projects have stalled elsewhere, including Hungary.

The U.S. has its own alternative-fuel woes. The price of corn, a key raw ingredient, has increased even as the market price for ethanol has been held down by oversupply. That has squeezed the profitability of ethanol producers and forced new players to cancel or delay construction of more facilities.

Oh, and the final tidbit that folks haven't yet understood. Biofuels are energy neutral at best. This means that the total energy required to produce a unit of energy of biofuels is a similar unit of energy. And the energy used to produce it is: you guessed it, fossil fuels.

There is a raging debate on the exact level of energy neutrality, with many environmental types applauding studies that show that fuels such as biodiesel have reached the threshold of being energy positive. However, this threshold is useless. Why? because at energy neutrality, biofuels are still tied directly to the price of fossil fuels. If it takes 1 unit of fossil fuel to produce 1 unit of biofuel, then as the price of fossil fuel goes up, so too will the price of the biofuel produced from it, and by a commensurate amount. Again, this economic fact will contribute to the stall in share of biofuel. This doesn't account for the supply-demand driven increase in the feedstock which adds to the problem. Even a slightly energy positive profile for biofuels will not change the fact then that they are useless as a hedge against rising fossil fuel costs.

When biofuels are an economical alternative to fossil fuels, the market will not need cajoling or prodding to accept them, it will do so. Until then the only effect that mandated biofuel usage, such as California's recent law requiring 5% of the states needs to come from biofuels, will have one effect. It will drive up your costs of fuel, and it will do so as much if not more than the rising costs of fossil fuels. Government policy is not helping in this matter. It is only hurting.

When it comes to biofuel policy (and any other economic policy for that matter) you should advocate one and only one policy: laissez faire!

Saturday, October 27, 2007

Hate crime legislation as punishing speech.

Wendy Kaminer had a great piece in the October 26th Wall Street Journal. In "The Return of the Though Police" she characterizes hate crimes as punishment of the thought or ideas that accompany a criminals commission of an act. That is, a "hate crime" is nothing more than a package of a crime and the thought that goes along with it. As such, it is a false concept, and leads to the politicization of crime.

Still, distinguishing hateful bias crimes from other hateful acts of violence punishes ideas and expression, no matter how scrupulously the legislation is crafted. When someone convicted of assaulting one woman is subject to an enhanced prison sentence or a more vigorous prosecution because his assault was motivated by a hateful belief in the inherent inferiority of all women, then he is being punished for his thoughts as well as his conduct.

I went searching for other expressions of this opinion and found two great op-eds at ARI. One by Robert Tracisnki and the other by ARI Director Yaron Brook.

Yes, cancer is as difficult to cure as I said it was.

In a follow up to this week's post on the state of cancer therapy, Opinion Journal.com has a great piece on the state of cancer therapy. Bottom line, early detection, a good surgeon, and diagnostics to determine which of the few drug therapies might benefit you are still what gives one the best chance of survival.

Tuesday, October 23, 2007

Legalize Drugs Now!

Got your attention? Think I'm going to talk about marijuana? Not on your life. I want to talk about real drugs; experimental cancer drugs to be exact. Earlier this year, a federal appeals court ruled that cancer patients cannot have access to experimental cancer drug therapies that have not been approved by the FDA.

For an agency supposedly chartered to protect the health and safety of the public, I can think of nothing more reprehensible than forbidding access to any medication to patients who may likely be dead before the medication is approved. Who's life is it, anyway? The state's? But then it's because the FDA ought not to exist as an agency, that the government has no business regulating healthcare or any other industry. Seeking justice after crimes are committed? Sure. Clogging up the system with bureaucratic red tape in the name of preventing as-yet-uncommitted crimes? That does one thing. It kills people. Literally.

Pharma companies are rued for making too much money on drugs, and cancer drugs are among the most expensive. As Stella Daily explains to us on ReasonPharm, that is due to very explainable reasons. Cancer is fragmented; it's not a single disease, but rather 300 separate individual, somewhat-related diseases. Compared to the market for cholesterol lowering drugs like statins, cancer is microscopic. But it still costs a fortune to develop any drug, and cancer is one of the tougher disease areas for which to develop. Most cancer drugs today are successful if they can extend a patient's life for a year or two, and most are targeted at late stage cancers. A cure is viewed as an almost unattainable holy grail. Compared to other diseases, cancer drug therapy is in the dark ages.

Pharmaceutical companies need one thing desperately to find new cancer cures: profits. Given small markets, large up front investment costs, and stunningly long approval times, rational companies seek greener pastures than oncology. That's not what I want. I want cancer to be profitable, because profits draws profit-seekers. And it is profit-seekers, the Atlases of the world, not bureaucrats, that discover life-saving medications. If people value their lives, they'll want the same thing.

This one is a matter of life and death, and also, it's personal. You see, I'm a cancer survivor. I'm a number in a box. 2001; Hit "Go"; Select "Incidence Counts"; white male; cancer type: testis. It was summer, so I'm guessing I'm around number 3,000 out of 6,596 diagnoses that year. 6,000 - 7,000 patients per year. That is hardly a market that will justify drug research. Luckily, early diagnosis, surgery, radiation therapy, and five years of monitoring have left me "cured". My chance of recurrence in my lifetime is probably less than 1%. But if it should happen, then between now and then I want drug companies working round the clock seeking huge profits on new cancer drugs. I titled this post "Legalize Drugs..." What I really meant was "Abolish the FDA"; it's the same thing really. I want the FDA gone, out of the way, so that these companies can work as quickly as possible and make as vast sums of money such that the best and brightest are drawn into the area of research. Any thing else is less than "life-saving".

Monday, October 22, 2007

Microsoft to EU: "Uncle..."

Today Microsoft said that it would not appeal a recent EU anti-trust judgement against it. This means it will allows itself to become subject to fines measured in 100's of millions of dollars, and coercive action to break up software bundling and allow competitor access to it's operating system.

It's a sad day, as this case sets poor precedents for other pending EU anti-trust cases.

Sunday, October 21, 2007

The Embattled Republicans

In a follow up to my post on the tribulations of the Republican Party, the Wall Street Journal Friday chronicles more of that party's woes for the upcoming elections. From the article "Republicans Running Uphill" it seems that Democrat National Committee is outpacing its Republican counterpart for campaign contributions, including from large corporate donors. This at a time when Republicans have more seats to defend than they would need to recapture the house.

I find this whole situation, though not ideal, satisfying. I'm not a fan of the Democrats, but the Republicans are hardly defenders of my principles, namely laissez faire capitalism. And until the social conservative faction no longer dominates the party, it might just do the trick to see them out of power.

Inhaled Insulin a Bust; Drug Development isn't that easy.

Free millions of diabetes patients from daily injections. Sounds intriguing, doesn't it? If there was a way to do this, then the replacement product would make a mint, right? Not so fast. Drug giant Pfizer announced this week that it was pulling it's groundbreaking version of insulin, Exubera. Launched little over a year ago, Pfizer and it's licensing partner, biotech Nektar therapeutics, had big plans for Exubera, projecting ultimate revenues of $2 billion. Both spent over a decade working on the drug, and pulling it from the market will come with a big write-off, almost $2.8 billion, one of the costliest drug failures ever.

Just another sign that finding blockbusters (the term for drugs that net over $1billion at maturity) is getting harder to do. Many pharmaceutical companies have begun targeting smaller niche indication areas because of reduced cost to develop and market such drugs. Most people look at market successes such as Pfizer aging Lipitor franchise, which earns the company $13 billion in revenue, and flush with envy. But this does not count the cost and risk that companies face in bringing drugs to market. All of those successes must pay for drug development and for the failures, such as Exubera, and still yield the next generation of winners.

The irony is that Exubera is a technical success. It works. But it was also a big risk. Diabetes is a widespread chronic disease, and therefore treatments for it must undergo very large clinical trials to understand their effects on such a broad target market, and over the long periods of time that the drug must be taken. Exubera failed due to a number of factors, all market driven, which illustrates the tricky nature of making decisions to launch new products like these.

First off, it costs too much. Insulin is not a particularly cheap drug to make, and because much of the drug is broken down in the lungs before it reaches, Exubera requires ten times the normal dosage for injected insulin! The normal rule of thumb for daily therapies such as diabetes or cholesterol treatments are that they are affordable at a rate of about $2-3/day. Exubera costs $5/day.

Secondly, it is somewhat complex to administer. One would think that a diabetes patient might to anything to avoid giving himself daily injections, but the reality is that companies have made injected insulin therapy fairly straight forward. Such innovations as pen injectors, and insulin pumps have taken much of the difficulty out of administering an injected therapy. Exubera's inhaler is a wieldy device that takes some time to learn and is used very differently from traditional injected therapy.

Finally, even though Exubera was shown safe to the lungs over long periods during its clinical trials, FDA was fairly tough on Pfizer and required warnings on the drug label. Doctors, continued to have concerns over the long term use of the therapy. This is again, not so much a technical issue as one of market acceptance, and consumer preference.

The outcome at the intersection of all of these factors are difficult to predict, but the investment required to go through clinical trials is not. This means that someone had to make a call on whether to invest the money to prove the drug worked, before they knew if the drug would sell. Sometimes those decisions succeed, and sometimes they fail, and the people who make them, instead of being reviled for making too much profit as the pharmaceutical industry is, should be allowed to make more profit.

Saturday, October 06, 2007

Who's Staying and Who's Leaving

Social conservatives and Fiscal Conservatives, that's who's staying and leaving the Republican Party. Some of us pointed to this trend after the last elections, but now it's front page news on the Wall Street Journal.

Already, economic conservatives who favor balanced federal budgets have become a much smaller part of the party's base. That's partly because other groups, especially social conservatives, have grown more dominant. But it's also the result of defections by other fiscal conservatives angered by the growth of government spending during the six years that Republicans controlled both the White House and Congress.

The most prominent sign of dissatisfaction has come from former Federal Reserve Chairman Alan Greenspan, long a pillar of Republican Party economic thinking. He blasted the party's fiscal record in a new book. In an interview with The Wall Street Journal, he said: "The Republican Party, which ruled the House, the Senate and the presidency, I no longer recognize."

The debate about which political party best serves our interests has been ongoing in Objectivist circles since before the start of the Iraq War. Many claim that we, and those who at least nominally think like we do are too small a population to make a difference, and that since the Republicans still have the business vote, they will serve our interests best. Look again. When the Republican party loses the business vote, what will it have that is of interest to anyone with Objectivist leanings? Answer: nothing.

Political dynamics in the US are much like swings in commodity pricing, where demand and supply is usually very balance, and small shifts in either cause huge swings in prices. So too, the country is split roughly 50/50 Republican/Democrat and that means that the swing vote calls the shots, so fewer voters need be of moderate persuasion to significantly impact election results. Witness the 04 election results. So it is that the so-called "fiscal conservative" or "libertarian" wing of the Republican party is a large faction and the Republican party cannot stay dominant without them, and the Democratic party would love to have them. And when factions are courted, one has an opportunity to try to make fundamental change.

I have no illusions that politics will change overnight, but it is the continued exercise of political will based upon rational principles, and the continued communication of those principles that will ultimately see shifts in both parties for the better.

Saturday, September 29, 2007

Microsoft: the Innovator?

For those of you Microsoft haters who love to trounce the company as an innovation laggard (which is a false claim in and of itself - but that is for a different post), comes a fascinating article from Forbes. In "Media by Microsoft" Daniel Lyons reviews Microsoft's solution for integrating the consumption of digital media (movies, TV, photos, video, etc), MS Media Center. Guess what. Microsoft is in the lead! The very next issue of Forbe's takes on Apple's version of this, Apple TV, redubbed in the articles title as "The iFlop". Take that, Microsoft bashers!

Friday, September 28, 2007

The Pharmaceutical Industry Under Attack

The Pharmaceutical Industry is one of the last industries where high value innovation occurs (the other being the IT industry). While Pharma is more regulated than IT, it has relative freedom within the U.S. to capture value for its product and in turn to fund development. This is evidenced by the strong Venture Capital market for young pharma companies, where it is still a viable financial bet to invest in companies whose products won't come to market for a decade or more. The only way this sort of investment is viable is if the possible payoff is huge and in Pharma, a successful blockbuster makes billions for its parent.

But witness a string of healthcare legislation, proposals from political candidates, and ongoing debates, all of which, if they make it to fruition will serve to continue to decimate pharma's long term prospects. Here's a round-up:

Drug Re-importation: under the guise of the government acting as an "efficient purchaser" of drug proposed legislation is nothing more than riding piggy back on European socialism. I had a whole post on this, and ARI's great op-ed beat me to it. Europe doesn't get better drug prices because they have access to volume discounts or to some magic to make pharma producers more efficient. They have them because they dictate the prices in their countries. Re-importing drugs through those countries is nothing more than adopting the same dictates, only in a seemingly "squeaky clean" Mafioso money-laundering style.

Post Vioxx increase in FDA's regulatory powers. From a recent Forbes.com article, "The Biggest FDA reform in a Decade", new legislation, quietly moving through congress, and attached to appropriations legislation would increase FDA's powers to meddle in pharmacuetical companies development programs. This includes dictating drug label claims to pharma companies, directing pharma companies to do post launch clinical trials, and forcing drug companies to make public all clinical trial results. All of these measures will serve to bottleneck and already too lengthy clinical trial process, increasing development costs even further.

Hillary Care 2.0. Another veiled attempt at socialized medicine. How many times must we see this kind of crap. ARI's again takes these to task, in both a letter to the editor (which I'll post when available) and a great op-ed by Noodlfood's Paul Hsieh.

Wednesday, September 19, 2007

ARI Speaks on the EU and Microsoft

In a follow-up to Monday's post on the EU Microsoft ruling, I wanted to point out that The Ayn Rand Insitute today issued two press releases on the topic (which I will link to when they are posted on the web site). In the first, EU Has No Right to Punish Microsoft, Yaron Brook, ARI's director articulated that dominant positions are not threats to free enterprise.

“This ruling violates Microsoft’s right to profit from the enormous popular acceptance of its Windows operating system,” said Dr. Yaron Brook, executive director of the Ayn Rand Institute. “Microsoft cannot force anyone to buy its products. If the company sets prices unreasonably high relative to its customers’ interests, then competitors are free to step in and offer a better value.  But if 95 percent of consumers choose to buy Windows software, then Microsoft has a right to profit from that success and not be punished for it.”

In the 2nd, End, Don’t Extend, the Persecution of Microsoft, Alex Epstein identifies Microsoft's persectution rightfully as persecution of the good for being such,

“Of course, Microsoft’s tremendous success is the whole reason it ever fell under antitrust prosecution in the first place. Antitrust law regards any company that has earned substantial market share as a dangerous ‘monopolist.’ Microsoft has suffered almost two decades of government threats and punishment on the grounds that its 90 percent plus market share in operating systems was a ‘threat’ to the consumers who eagerly chose Microsoft Windows over the competition. Microsoft used no force or fraud against anyone; its ‘crime’ was to choose to add a valuable feature, a Web browser, to its popular operating system.

Great articles both!

Monday, September 17, 2007

EU to Microsoft: "You're too good"

That was the main message to Microsoft today as a European Union court ruled against the US software company in an appeal of its previous anti-trust ruling. Fines and penalties against the company could reach over $2 billion.

Microsoft's crime? Bundling it's music software, Media Player, with its Windows operating systems, and failing to instruct competitors on how to make their systems communicate effectively with Windows. So says the ruling, but the real crime is Microsoft's dominance of the operating system software. From today's Wall Street Journal:

European regulators hailed the court decision as a victory for consumers, who, in the words of Competition Commissioner Neelie Kroes, are "suffering at the hands of Microsoft." Ms. Kroes said she would like to see a "significant drop" in Microsoft's nearly 95% market share in operating-system software.

These consumers who are being hurt, when offered a choice by Microsoft between Windows with Media Player and without, voluntarily chose the version with Media Player. The claims are laughable. Microsoft may have Windows on 95% of people's Intel machines, but this in an era when the operating system is becoming less important and web based application hosting such as Google's fantastic suite are sucking the value (i.e. price) out of bundled operating system packages. Microsoft may bundle it's Media Player with Windows, but that doesn't prevent the iPod and its necessary music player software, iTunes, from dominating the segment. Yes, everyone has Media Player on their Intel machines, but those people who are actually listening to music to any degree are listening to it on iTunes, and their iPods. Microsoft is squelching its competition, at least, the competition that tries to be just like it. But that doesn't mean it can stop any competition whatsoever, as Google and iTunes prove.

And how do our politicians respond to the EU's move? With seeming concern,

The U.S. Justice Department's chief, Thomas Barnett, contrasted Europe's approach with America's. He said that in the U.S., even dominant firms "are encouraged to compete vigorously," while Europe's stance may end up "harming consumers by chilling innovation."

This seeming contrast is nothing but a separate forms of the same principle, that the best corporations are a danger to the marketplace and must be stopped, either by being hamstrung by regulations or stripped of their competitive advantage and forced to compete on "level playing fields". Will the real defenders of capitalism please stand up? They are not in this bunch.

Even Microsoft can't properly defend itself, arguing that "traditional anti-trust tools aren't appropriate for fast-moving technology industries." Implying of course that they are appropriate for slow-moving traditional industries, when in fact, slow moving industries became that way due to over-regulation and anti-trust limitations.

There is only one proper answer here: laissez faire. Monopolies which hurt the consumer, cannot exist for long in a free economy where proper rights are enforced. Microsoft has continued to innovate with new generations of its operating system and yet has still seen its revenues stall, and it's share of components (email, music, etc) of its operating system decrease. And this has not been through the use of regulation, but rather through good old-fashioned competition.

I use a Vista machine and I use Media Player with 3rd party music player. However, my email, photos, blogs, maps, and soon calendar and even documents are hosted by Google. My browser is Firefox, my finance software is Intuit's Quicken, and my picture and video editing are all Adobe Elements. All have Microsoft alternatives, and many are already bundled with Windows. No matter. This component erosion means that Microsoft cannot get the same revenue per copy of Windows, and this shows in its stalling top line growth.

Markets don't fail, and it's time our politicians learned that.

Saturday, August 25, 2007

The Human Element and this human element

The ad campaign has been out for some time how, but I've wanted to blog on it for a while and this seemed like an appropriate time. For the first time, I can remember, my company has put out a corporate branding campaign that is inspirational, at least at it's highest, most philosophical level. Dow's Human Element campaign started with a series of prominent TV commercial spots, and introduced a theme that is truly inspiring, in the Objectivist sense. That is that it is man, and man's mind, i.e. reason that is at the heart of innovation, and progress. The commercials almost make me cry. What I love about them is that at the close they are even emotionally integrated, alluding to the fact that the chemist and the marketer, through the use of their reason and passion, are inextricably bound to the sculptor or the writer or the poet.

Unfortunately, Dow's follow-on use of this theme in trying to concretize this idea, brings in mixed concepts such as environmental sustainability, energy conservation, and volunteerism. While disappointing, it should not take away from the visibility attained through the initial message. Maybe it's a sign that our culture is shifting, but ever so slowly. [And if one think that those who hate capitalism aren't still alive and strong, look to the perversions of this theme to show utter hatred for companies like Dow, who have long been lighting rods for environmentalists, and anti-industrialists.]

But it is this idea, this fundamental idea or belief in man's potential, his reason, his passion that is so purely represented in the first commercials from the series. Such an abstract idea, but yet it is present in each and every decision we make, each goal we set, and each plan we put into action. It is concretely identifiable in each one of us.

For those who don't know, this year has been a year of significant change. I've reconnected with my intellectual self, righted some mistakes in my past, and come out all the better for it. One of those changes has been physical, namely the loss of a few pounds and improvement my physical conditioning, hoping to once again compete in endurance races at a respectable level. That particular plan has progressed very well so far. I'm at my target weight; I feel as good as I did 15 years ago, and the training is on plan. However, I have yet to test myself, to measure my progress according to the standard of my goal, competitive racing. My first race is not planned until Labor Day (a "warm up" 10K run), and then my season culminates in 2 duathlons (run-bike-run) in mid September and early October.

That schedule changed today. I've been curious as to where I stand for some time now. About a month ago, I surprised myself after a hard 1 1/2 hr training session, which involved several tempo intervals (intervals at race pace), by jogging over to the local High School track and ticking off a 7 minute mile without a problem. My 5K PR (personal record) is a 19:16 (which got me 7th place at a local race) and is approximately 6:20 miles. A 7 minute mile is within striking distance of that time!

So today I had planned a 2 hr bike workout, but awoke to a pouring rain. I was disappointed. I needed the workout, and I'd been running all week so I was looking forward to the bike. I dressed and headed over to the gym instead. On the way, I remembered that there was a local race today. As part of their Human Element campaign, Dow is the primary corporate sponsor for The Blue Planet Run, an around-the-world "ultra marathon" performed by a small team of runners, to build awareness for the need for purified drinking water. That run happens to pass through my town (the corporate HQ of Dow) today and there are all sorts of events planned to celebrate, one of which is a 5K race. hmmm.

After an hour of spinning at the gym, I am drenched and bored. I really want to be outside. I have 6 months of Michigan winter to look forward to in the gym, and this is not it yet. Finally, I throw in the towel in frustration. "That's it," I say to myself, "let's take these babies over to the race and see what they can do." Race is at 5. It's 10 now. That means I've got 7 hrs to get rehydrated, rested and mentally prepared to put out a race quality effort.

And now the synapses start flashing and I am in preparation mode. Suck down two Power-ades on the way home. Plan light lunch at noon. Then it's on to strategy. I haven't been training for a race this short, but rather longer ones. That means I'm not used to running at top of my heart rate range and I will have to factor that in. I'll also have to mentally get into the groove quickly because the race will be over in 20 minutes and any dallying at the beginning will spoil my outcome.

Strategy is simply, really. What I show up with in terms of speed and endurance physicality is already fixed by my training. There is nothing I can do about it. The only question is can I execute at maximum potential. To do that means one thing, knowing where my "redline" is, getting to it as quickly as I can, and gutting it out for the rest of the race. Redline on a human is measured by heart rate. My lactate threshold, i.e. my redline, is about 167 bpm (beats per minute). My race zone is 160 - 167 bpm. I have trained into this range on several occasions during interval workouts, but not  maintained it for more than 6-8 minutes. That means this race is going to hurt more than any of those workouts, and I have to prepare myself for it. I'll wear a heart monitor, and carry my stopwatch, to monitor my tempo and make adjustments. I don't expect to hit my PR, but I'd sure like to come close to it. If I do 7 minute miles that will be just over 21 minutes. I'd like to go sub 20.

Sun's out now. Could have gone riding.  Too late. I've paid my money and got my number and my chip. I warm up well; putting my heart rate up to 160 before the start. Once we've started, my heart monitor skitzes during the first 3/4 mile! When it finally comes back on, I'm at 169, woops, too high. I dial back, and try to settle in and find a "rabbit" someone running at the same or just higher pace who I can pace off of. I see a guy I know; he's 33 and a good runner, so I settle in behind him. Mile 1: 6:17, uh oh this is going to put me higher than 20 minute time. First mile should be 5:50 - 6:10, because the rest will be longer. I try moving up to 169, but it's a bit more than I can handle at this point. Mile 2: 6:40, this is going to put me at 20:30 at best. Need to find a way to increase just a bit, and need to do it now. I ramp up to 174. Heart is pounding in my chest. My breathing increase almost to gasping. I'm closing on the runner up ahead of me, but not fast enough to pass him by the finish. At the finish, I'm 20:25, and ecstatic. I didn't go sub 20, but finished at sub 7:00 mile pace on all my miles, and without anything left so I know that this was probably my best possible time. I estimate I placed about 20th overall (in a field of 300) with an age group placing of 5th. I'm 15 years older than my last PR, and I was only off by 1 minute. Had I not worked out in the morning or been training for sprint events, then maybe, just maybe, I could have beaten it. So now I know where I'm at, and can adjust my training over the next month before the race on Labor Day.

I've written about racing before. To me this is the concretization. The thing that shows me the Human Element in action. The initiation of a thousand separate actions that add up to one long term outcome.

[Author's note: This post was a stretch, and the subtitle could have been "How Kendall Snuck a Race Brag onto His Capitalism Blog" but there are things that just must be done on a runners high, and this is one of them.]

Praise for Windows Live Writer

Live Writer rules. That's all there is to it. A client based program that interfaces with my online blog. It is essentially my journal, my repository of all my blog ideas. Offline or on. It's interface is intuitive. It is able to show me what my blog will look like once its up, without uploading it. I like Blogger, but I hate its editing interface. Live Writer does the trick. This my second blog post using it on my new laptop, and already the process of composing posts is so much simpler.

Thanks Diana for mentioning it, although I cant find the reference just now. Noodlefood rules too!

Friday, August 24, 2007

Esthetics and Commercialism

On my recent trip to China, as I perused the stack of magazines I'd brought with me, I happened upon Virginia Postrel's article Dress Sense.  I have been a fan of Postrel since she was editor at Reason, and have been enthusiastically watching her break into mainstream journalism. I ripped out the article as I do with all the articles I find compelling, folded it up and put it in my briefcase, not quite knowing what I'd write, but knowing there was something interesting in the article.

The article makes the case that fashion is museum worthy, as a form of art. Not just from a historical perspective, but from a design and beauty perspective. What I found fascinating was her description of how fashion, specifically commercial fashion of the last century, is eschewed by museums as unworthy of display.

Behind the criticism of fashion as an artistic medium is a highly ideological prejudice: against markets, against consumers, against the dynamism of Western commercial society. The debate is not about art but about culture and economics. Critics who decry fashion collections are less troubled by the prescribed costumes of dynastic China or the aristocratic dress of baroque France than by the past century’s clothes. With its fluctuating forms and needless decoration, fashion epitomizes the supposedly unproductive waste that inspired 20th-century technocrats to dream of central planning. It exists for no good reason. But that’s practically a definition of art.

Her case takes this argument on, and this is what I love about Postrel. She sees the intersection of esthetics and business as a good thing. Business is not some grubby corrupter of high art, but rather the enabler or creater of a broader audience for it. Her phenomenal book The Substance of Style, which overviews the proliferation of esthetic design in  popular culture (think iPod, Crate & Barrel, etc.) specifically makes the case that it is the innovations in manufacturing, distribution, and resultant rising income levels, that have created an "esthetic abundance" of selection available to the average consumer. That mass customization enables the proliferation of personal esthetic choice.

And so rather than the everyday trying to "wedding crash" the province of high art, we have artistic elements making their way into the everyday, with capitalism creating the opportunity for this to happen. And when one looks at history, one can see that this has always been so; that the commercial in art has enabled it to exist and to flourish. Michealangelo was paid to paint the Cistine Chapel. Some of the best artwork of the late 19th and early 20th centuries was also commissioned work. I think of Maxfield Parrish  whose paintings were prominent on the covers of magazines such as Collier's, Scribner's, and Century, and also on calendars. Or Hollywood photographer George Hurrell, whom Postrel highlighted in her Atlantic article Starlight and Shadow who created the lighting techniques that gave 1940's Hollywood it's glamour. People who created art to be appreciated and viewed by someone so much that they were willing to pay money for the opportunity. This is the highest expression of the value of a work of art, as described by Ayn Rand in T he Romantic Manifesto; the highest expression of the desire and need of man to bring his view of the world into full, conscious, concrete focus.

Art is a concretization of metaphysics. Art brings man's concepts to the perceptual level of his consciousness and allows him to grasp them directly, as it they were percepts.

This is the psycho-epistemological function of art and the reason of its importance in man's life (and the crux of the Objectivist esthetics).

Just as language converts abstractions into the psycho-epistemological equivalent of concretes, into a manageable number of specific units-.-so art converts man's metaphysical abstractions into the equivalent of concretes, into specific entities open to man's direct perception. The claim that "art is a universal language" is not an empty metaphor, it is literally true—in the sense of the psycho-epistemological function performed by art.

The insertion of artistic elements into the everyday has value, and those who do it, and those willing to pay for it are the good. And so why shouldn't a gown be considered for it's artistic beauty? Is it not in reality, as Postrel so aptly characterizes, a sculpture, three-dimensional and made all the more ephemeral by the fact that it is designed over the framework of the human body, and to be seen in motion, and to be touched? Compared to the piles of garbage and canvases of painted blobs that pass for art in today's "Modern Art" museums, and exhibition of 20th century fashion would be a welcome addition to any museum.

Wednesday, July 04, 2007

Flags and John Adams

I just put out my flag for the 4th of July. A small gesture that I always do with a bit of reverence to mark what is probably one of the most important days in the history of mankind. It is not the first day a man was able to live freely, nor was it the first day that his right to do so was proclaimed, but it was the first day that the principle was declared to be the founding basis of government.

The Declaration of Independence laid down the principle that "to secure these rights, governments are instituted among men." This provided the only valid justification of a government and defined its only proper purpose: to protect man's rights by protecting him from physical violence.

Thus the government's function was changed from the role of ruler to the role of servant. The government was set to protect man from criminals—and the Constitution was written to protect man from the government. The Bill of Rights was not directed against private citizens, but against the government—as an explicit declaration that individual rights supersede any public or social power.

-Ayn Rand
More than any other Founding Father, this day is due to John Adams, probably the premiere intellectual father of the United States, and the one who fought most adamantly to see this declaration passed. Here are some of his thoughts on the importance of this day [written in the days leading up to July 4]
The object if great which we have in view, and we must expect a great expense of blood to obtain it. But we should always remember that a free constitution of civil government cannot be purchased at too dear a rate, as there is nothing on this side of Jerusalem of equal importance to mankind.

Objects of the most stupendous magnitude, measure in which the lives and liberties of millions, born and unborn are most essentially interested, are now before us. We are in the very midst of revolution, the most complete, unexpected, and remarkable of any in the history of the world.

The second day of July 1776 [the date the Declaration was voted on and a majority was for. Revisions would take another two days.] will be the most memorable epocha in the history of America. I am apt to believe that it will be celebrated by succeeding generations as the great anniversary festival.
May you recall the import of this day and have a very happy 4th!

Monday, July 02, 2007

Thoughts on China

I have returned from my first business trip to China earlier this month. It was an eye-opening experience, as I got to see first hand the progress that has been made there, and better understand what is occurring in the country. The particular issue of how to deal with China is important to me. My job just became global and so I have product responsibility for some products that are sold in China. I have discussed this topic multiple times on Objectivist forums, here, here and here. It was the response to my posts on this topic by the moderator of The Forum that was behind my reason to leave it permanently. Of all of the ethical issues, beyond those in my personal life, this is probably one that is most critical to me, professionally.

When I returned home I was surprised to find two cover articles that echoed the feeling and perspective I soaked in during my visit. One was in the Atlantic, by military columnist James Fallows entitled “China Makes, The World Takes”, describing the nature of China’s Economic Development Zones, and the other in National Geographic describing the “boom towns” that have popped up all through those same zones. These are fantastic concretized descriptions corroborating what I saw. But more importantly, they give a ground level look at how capitalism is penetrating China today. I highly suggest them.

The standard Objectivist response to China seems to be something along the lines of “China is a rights-violating, cesspool of a Communist dictatorship. It is clearly our enemy. We should do everything in our power to isolate it and see it collapse completely as we did with the Soviet Union.” Rand was certainly hostile to Communism, for good reason, and openly advocated the complete isolation of Soviet Russia. In contrast, when I discuss a country such as India with Objectivists, I get a much more favorable response to dealing with that country, even though it is openly socialist and in many ways still more backward than China.

I have problems with this position. First, while this isolation strategy contributed to the collapse of the Soviet Union, I am not convinced that the aftermath in post-Soviet Russia has left us in a secure position. Russia is largely a nationalist, ganster, nuclear state, and its future course is could hardly be called stable. Second, the isolation strategy belies the current state of China. That is, maybe in 1972, when Nixon began thawing Chinese relations, the proper course would have been to continue advocating isolation. But I was all of 4 years old then and I am only now in a position to take actions that actually have ethical bearing on China. Today’s China is hardly Nixon’s China, and that is the point.

Anyone who continues to advocate that embargo of China is the best course of Westernizing it has absolutely no understanding of what good things are actually occurring there, and the scale on which it is occurring. The first thing to understand is that China is not a single country uniformly inching toward a market economy while preserving its Communist ideology. It is really two Chinas. One that is advancing slowly, remaining nominally socialist, and the other that has jumped headlong into a “wild west” form of proto-capitalism. The story of the second begins in 1980, when the Chinese government established its first Economic Development Zone in Guangdong province in the Shenzhen area, next to what was then estranged, and very capitalist, Hong Kong. Since that time, four other national zones have been established in China and the Shenzen area has been expanded into the whole Pearl River Delta. In addition, 15 free trade zones, 32 state-level economic and technological development zones, and 53 new- and high-tech industrial development zones have since been established.

These zones are booming, and the rural population is flocking to them. When you look at a map of the development zones, it appears rather small, until you realize that much of China’s 1.3billion population is concentrated on the coast, and that the zones have swallowed up all of the coastal provinces from Shandong, just north of Shanghai all the way down to Guangdong, surrounding Hong Kong. I did a quick calculation of population, and counting the five provinces and the municipalities, this is about 330 million people, all of whom are now living in a semi-free economic state. That is more than the population of the United States! According to James Fallows, the Shenzhen area by itself contains a larger manufacturing workforce than the entire manufacturing workforce of the U.S.! Estimates are that 140 million rural Chinese have moved into these zones, and another 40 million are expected in the next five years.

What’s going on in these zones? It’s very simple: wild-west, capitalistic, manufacturing; everything from high-tech electronics to bra rings. It is estimated that at this pace by 2020, 25% of the world’s manufacturing capacity will be in China. Make no mistake folks, this is wild-west capitalism, not too un-reminiscent of the boom towns of the American Industrial Revolution. And it appears to be working. Is there corruption? sure; crime? yes; pirating? of course; is it all done under the auspices of Communist “national planning”? yup. But what seems to be lacking is: tyranny. That is, the government largely stays out of day to day affairs. Certainly they take a cut off the top, primarily in two forms: at the beginning of the process by selling “land use rights”, the closest thing to property rights, and thus making land available for development, and then through an ongoing company income tax (which at 15-30% is lower than that of the US – but that is another post.) Beyond that, very little. Witness James Fallow’s question to an expatriate in Shenzhen who runs a company that specializes in helping foreign companies navigate the process of outsourcing to a Chinese company.
Government policy and favoritism may play a big role in China’s huge road-building and land-development policies, but they seem to be secondary factors in the outsourcing boom. For instance, when I asked Mr. China [expat Liam Casey] which officials I should try to interview in the local Shenzhen government to understand how they worked with companies, he said he didn’t know. He’d never met any.
Witness, a person who runs a local Chinese company specializing in helping other companies establish Chinese supply. He’s not helping them cut through bureaucratic red tape. There isn’t much. Instead, in this wild-west boomtown, where factories spring up daily, and there are no local directories telling you which factory has the “Good Housekeeping” seal of approval, this man specializes in knowing which factories can do what you need, and which can't. This absence of government intrusion is not the earmark of a totalitarian government, rather of a mixed economy.

The result is an economic boom, the likes of which has not been seen probably since the industrial revolution. I witnessed this first hand. I drove from Shanghai to Suzhou, two hours by car on a super highway littered with factories and new construction. Never once during that drive was I out of sight of a construction crane. A colleague of mine who began traveling to China a decade ago said that this road was unimproved in 1999 and the land was all farmland. Two hours drive! This simply can’t happen voluntarily without some element of capitalism being present in the structure of these zones. Is it perfect capitalism? No, but I don’t think it qualifies as tyranny.

Clearly a quarter of China’s population now lives in a mixed economy. What are the fundamental aspects of that life? They keep what they earn. If they save enough, they can start a business of their own. Hustle drive and hard work pays off. It infuses the population with an energy and a hope that I found contagious, almost like Chicago in the mid-nineteenth century. Conditions can be Spartan, but make no mistake, people are there voluntarily because this life offers far more opportunity and hope than their previous lives did.
“In the movie version of Balzac and the Little Chinese Seemstress, two teenaged men from the city befriend a young woman in the mountain village where they have been sent for rustication during the Cultural Revolution. One day the young woman unexpectedly leaves. She has gone to “try her luck in a big city,” her grandfather tells them. “She said she wanted a new life.” The new life is [in Economic Zone] Shenzhen.

Multiplied millions of times, and perhaps lacking the specific drama of the Balzac tale, this is the story of the factory towns.”
Witness the ideas scribbled by workers on the walls their dormitory in Lishui.
“Find success immediately.”
“Reflect on the past, consider the future.”
“Pass ever day happily! A new day begins from right now!”
“Face the future directly.”
“A person can become successful anywhere.
"swear I won’t return home until I am famous.”
I have no illusions about the possibility of reversals in China’s progress. The Chinese government has built a system of contradictions. Proper grounding and acceleration of this progress requires the right ideas, and ideologically China is adrift. It is possible that the government will reverse course, or that there will be civil unrest in the poorer, nominally Communist provinces. But to advocate for the destruction of what has happen via a policy of isolation makes no sense. It is a step backwards on a path that is already built in the right direction.

Once one understands the magnitude of what has happened and the level on which it has happened, one cannot help but consider that there are now significant barriers to a direct reversal that are strengthening every day. Most notably, a quarter of the population now sees concretely the effect of a free market, and of property rights. I have significant doubts that they will allow that to be taken away quietly. Second, I have to believe that the government, like all governments of mixed economies, see the benefits of allowing such areas to continue to exist. That is, they realize they have created a golden goose, and knowing what life was like before having it, they are hesitant to do away with it so easily. Is this principled capitalism? No, but then no mixed economy is. Instead China lives in the same sort of government parasitism of all mixed economies where the government maintains it support by appearing to improve the lot of the people, and then preserves its power and influence by skimming off the top of the productive capacity of the people. It is a self-interested but Machiavellian relationship. While China has super-power aspirations, it is much more likely to thread that path carefully rather than risk losing it in a direct confrontation. I believe that China is becoming less of a threat because has its existence highly intertwined with the U.S. economy. Unlike protectionist Japan after WWII, who chafed at foreign investment and set up local companies that would one day compete with American companies, China works to serve the U.S. market. With access to American markets necessary to fuel its economic growth, China has made significant concessions in its economic structure in order to gain Most Favored Nations status and WTO membership. Those compromises are significant victories in the effort to eliminate the Chinese threat. If its economy is a golden goose, then favorable relations with and access to U.S. markets feeds that goose.

So maybe instead of the Cold War isolationist strategy, barring contact with our enemy and supplying dissidents with weapons, the proper stance on China should be to acknowledge the uniqueness of the situation and the capitalist values it has achieved, and work to arm its people with the proper ideas so that they can continue that progress. It is China’s people after all that have to recognize and fight for the continuation of their progress. Maybe they need ideas in their current state more than they need weapons.

China’s manufacturing economy remains a small factory, commoditized output, fragmented economy. The next step in China’s path to capitalism will be consolidation, the creation of companies that will be capable of competing on the basis of more than just manufacturing, the building of the first companies capable of becoming true multi-national corporations. But to do this, they will need several things: adding protections for human rights most notably for intellectual property, establishing a functioning legal system, and educating management talent. It is business management talent that is sorely lacking in China right now, but this is what will open the doors to the next level of introduction of Western ideas. Today, the Chinese workingman understands concretely the potential created when he is able to keep what he earns. Tomorrow, the Chinese businessman, if he is to have any hope of running a successful multi-national must understand what conditions are necessary for running a successful business. He must understand this to be able to fight to hold onto it.

China is a complex case, and it is most certainly not a fait acompli, but I believe that if one understands the nature and scale of what has already occurred then the basis for the standard Objectivist response that isolation is the only course is not so clear cut. Certainly we must continue to advocate for change in China based upon proper philosophic principles just as we do here in the U.S. But the path between the present state and future success may have more than one road.

Saturday, May 05, 2007

On Competition

It would seem that competition is a fundamental aspect of capitalism. Anti-trusters, in their zeal to regulate business, would have us believe that a market without competition is coercive, and requires legislation in order to restore competition to it. Right-wingers have a zeal for competitive mechanisms, as they try to inject it into such government run programs as education (school vouchers) or health care (re: private insurance options). It is “competitive” mechanisms that will cure inefficient government programs.

But looking through the Objectivist literature, one is hard pressed to find much mention of competition as a fundamental of capitalism. It has a brief mention in the Lexicon, mostly related to government enforcement of such, and it has no mention in the entire OPAR section on capitalism. Competition isn’t an Objectivist virtue, like independence or productiveness so it doesn’t even seem to have an ethical basis. I know that independence and productivity are virtues, and that being “second-handed”, i.e. placing self-worth using others as a standard is wrong. I know that capitalism is the proper political system, and I sure see a lot of preoccupation with competition in capitalism. This leads me to wonder just what the proper attitude toward competition should be. Is it fundamental not? Is it good or not?

My family used to run a Labor Day race every year, A 5K run through the woods of northern Michigan. Our last running of this race found my step-son and I alone on the trail at the half-way point with about 15 minutes to go.

Kendall, I don’t think I can keep running. My legs hurt,” my son said through labored breaths.

hmm. Ok, well maybe we can stop to walk a bit. Tell you what though. See that runner up there,” I said motioning to a woman about 100 yards ahead who had been steadily falling back.

“yeah.”

“Is she closer to us now than she was five minutes ago?” I asked.

“I think so,” he responded.

“OK, well that means she started out too fast and we’re going to catch up to her. Do you think you can keep going until we do?”

“Yeah, I think I could do that,” he replied, gauging the distance and the time required. And we stepped up the pace just a little and began closing the gap. He focused on the gap between us and the runner, and he increased his stride, ever so slightly.

After passing her, my son spoke up. “Hey, you know that guy up there looks like he’s falling back too. Maybe we can catch him. Do you think we can in time?”

“It looks like it,” I said. “We’ve got another mile or so to go.”

When I look at top tier businessmen that I know, I see similar responses to competitors. They take a keen interest in what the competition is doing, but never to the extent of allowing the competition to define their actions. Nor do they react emotionally to frustrating moves that the competition makes. Any emotions that are expressed are usually based in a sense of friendly rivalry or respect, especially for able competitors. Mostly, they learn from their competition and focus on their own goals.

Second and third-tier businessmen, however, show the signs of second-handedness. They are preoccupied with the competition. They may respond emotionally and with frustration at competitive moves and make strategy decisions out of a desire for retribution rather than true self-interest.

And so from these few examples I start to get a sense of the proper characterization of competition. It is a side-effect of capitalism. Competition is the natural result of men who practice the virtues of independence and productivity, within a society based upon rational self-interest, and man’s right to pursue it. It is an effect, not a cause.

“Competition is a by-product of productive work, not it’s goal. A creative man is motivated by the desire to achieve, not by the desire to beat others.” - Ayn Rand ["The Moratorium on Brains", The Ayn Rand Letter 1,2,4]

And the proper psychological attitude toward competition? Well, implicitly I understood this from the race with my son. It came to me explicitly as a result of thinking about a discussion on ObjectivismOnline.com on personal motivation. Competition is a positive tool that we can use. It helps us to learn about the nature of the game we’re playing and to set intermediate goals. It gives us concrete gauges by which we can measure our own progress and performance. It is one of the ways that we turn productiveness into excellence. The same is true in business. The proper attitude is one of benevolence (and maybe a little rivalry) toward honest competition, and of respect and admiration for ability in our competitors.

And the implication for our would-be policy makers who fancy competition, as such? Simple. Focus on creating the causes of capitalism, namely namely individual liberties, and markets free from coercion. Only then will the effects be properly seen. However, if one tries to legislate the effects by short-circuiting the causes, failure is the only outcome.

The only actual factor required for the existence of free competition is: the unhampered, unobstructed operation of the mechanism of a free market. The only action which a government can take to protect free competition is: Laissez-faire! - Ayn Rand
My son passed three more runners that day, two (including yours truly) at the final sprint to the finish, which he initiated 200 yards before I would have. I never heard about the pain in his legs again. We have no idea how the runners we passed ended up, and it really doesn't matter, but I know that he ran longer and harder than he would have otherwise - because of the competition.

Tuesday, May 01, 2007

Chavez Nationalizes Columbian Oil Projects

In a follow-up to my post on Bolivia's Evo Morales nationalization of Bolivia's oil fields, it seems that Latin Socialists are at it again. This time, it's Hugo Chavez who is holding ceremonies to nationalize four Columbian oil projects, pushing out national firms (now that they've done the hard work, of course)

There is no denying that natural resource, especially oil, artificially prop up socialist dictators by masking the damage done by their policies. And Mr. Chavez is on a mission to damage the United States as best he can. From May 1, 2007 Wall Street Journal article on the same topic.
...as long as Mr. Chávez is in charge, his government seems bent on favoring
state-run companies from governments he considers friendly. Consider the list of
winners of contracts handed out to companies to certify oil holdings in the
Orinoco region in the last two years: Vietnam, Iran, Brazil, and China. Last
month, PDVSA signed a deal with Belarus to work in the Orinoco. Meanwhile,
today's nationalization ceremony pushes out U.S. companies
Exxon
Mobil
Corp., ConocoPhillips and Chevron Corp., along with Britain's BP PLC, France's Total SA and Norway's Statoil ASA.

For a time I used to get frustrated about the artificial success of disgusting policies like these. I still chafe at the injustice, but I also know that once the oil becomes more expensive to develop and produce that the tarnish will show on Chavez' rhetoric and the rhetoric of those like him. The cost of extracting oil increases long before oil reservoirs are depleted (even Saudi Arabia's oil fields are nearing a marked increase in production cost once they shift to secondary production), but it happens slowly; enough time for at least one or two generations of socialist thugs like Chavez to prosper. Underneath however, one can see the impact that his policies are having.

However, Mr. Chávez's own policies may stand in the way of him carrying
out his plans. The leader's focus on social spending has turned PDVSA into a
poverty-alleviation ministry more than an oil company, and left the company with
little focus. Venezuela's output has fallen to 2.4 million barrels a day from
3.1 million barrels a day since Mr. Chávez took office in 1999. Mr. Chávez
recently paid off the last portion of debt owed the World Bank using Venezuela's
oil income and paid off all debts with the International Monetary Fund shortly
after taking office.

Raiding oil profits to pay off national debt and put the country on welfare (along with providing handouts to other socialist countries) will mean that when costs do go up. PDVSA won't have the resources to continue without help. Here's hoping that foreign oil companies don't give it to them, at least until someone better than Chavez is in office.

Saturday, April 28, 2007

U.S. Becoming Less Competitive

As a follow up to my post detailing how the US is becoming less competitive as a center for global manufacturing - even when compared to other developed nations, a March 26, 2007 Forbe's article "Crouching Tigers" confirms that European nations are favoring corporate tax cuts and deregulation (although they still have a long way to go).

Pay attention to the graph, folks.

If you think the Republicans are business-friendly, think again. "Compassionate" progressivism in tax cuts, with corporations and the rich bearing more of the national tax burden is nothing more than punishment of the good for being good.

Friday, April 27, 2007

The Ten-Cent Solution

In our mixed economy, where many industries are partially or sometimes wholly socialized, I find a curious phenomena. Such industries are rife with myths designed to perpetuate the socialized status quo. And because there are few examples of free-market solutions, the debate about the problems and issues with these institutions includes only weak or outright straw men arguments for the free market.

Take education, an industry which is roughly 90% public (i.e. socialized), according to the Council for American Private Education. Myths of the need for public education abound here. Some include:
  • All children, regardless of means, need a "full service" K-12 education, one that includes many teachers, a full range of possible course choices, extra-curricular activities, and capable facilities. (The implication is that not everyone can afford such a necessary education and so it must be a socialized institution)
  • Teachers are never paid enough for the "value" they bring to society by educating our youth, and this observation is true of all teachers regardless of performance.
  • Private schools are an "upgrade" from public schools and as such are typically only relevant to the rich. Indeed, there is no way private schooling could educate the poor since it must rely on such a weak source of income to fuel its curricula (which of course can only suceed if it is "full service")
  • Education is a societal need, and as such it is a "loftier" responsibility than mere commerce is capable of handling.
I've heard all of these arguments for public schooling, and it is sheer bunk. Were it not for the fact that the public school system has a near monopoly on the industry, it would take only a few hard examples to show the flaws in these arguments and to show the capable, education industry that the free market could build in place of socialized education.

Enter a clear example of the success of the free market, not in educating the rich, but in educating the poorest of the poor in the poorest countries in the world. In a March 2007 Atlantic article, The Ten-Cent Solution, one researcher has found a hidden grey market for education among the poor of Hyderabad, India, and other third world cities.

In Hyderabad, a city of more than 6 million people, Tooley and his team—confining their search to poor areas lacking amenities such as running water, electricity, and paved roads—counted 918 schools. Only about 40 percent were run or financed by the government; 60 percent were private. Of those, some were “recognized” by the government, but most were officially unknown to the authorities. These black-market private schools were smaller on average than the other kinds—but they still accounted for about a quarter of all the children in any sort of school. Remarkably, some of the slots in these private slum schools were offered free or at reduced rates: The parents of full-fee students, desperately poor themselves, willingly subsidized those in direst need.

This flourishing educational enterprise is all the more surprising once you understand that India has deliberately discriminated against private education—forbidding for-profit schools, for instance, and requiring schools to be run as trusts rather than proprietorships, and limiting their ability to borrow. Despite these handicaps, private education for the very poor has evidently thrived...

As Tooley relates it, the response of the international development community to his research has been less than enthusiastic. Even if private schools are much more prevalent than we had previously thought, he’s been told, they are obviously no good. Standards in such schools are bound to be low.

But the development community seems to be wrong about that, too. On the whole, dime-a-day for-profit schools are doing a better job of teaching the poorest children than the far more expensive state schools. In many localities, private schools operate alongside a free, government-run alternative. Many parents, poor as they may be, have chosen to reject it and to pay perhaps a tenth of their meager incomes to educate their children privately. They would hardly do that unless they expected better results.

Better results are what they get. After comparing test scores for literacy and basic math, Tooley has shown that pupils in private schools do better than their state-school equivalents—at between a half and a quarter of the per-pupil teacher cost. In some places, such as Gansu, China, the researchers found that private schools serving the poor had worse facilities than comparable state schools; in Hyderabad, they were better equipped (with blackboards, desks, toilets, drinking water, and so on). Regardless, the tests so far show that private-school students do better across the board.

I love examples like these. Here in one example you have clear refutation of most of the myths above, and additionally a clear demonstration of the bias of advocates of socialized medicine against private education, even in the face of hard data. Here is the reality:
  • What particular education is of value is contextual. That is, it depends on the needs of the child being educated and the particular means of his parents. And so the market will respond by offering all sorts of options for education, allowing the individual to choose which options best fit his means, and capabilities. Just as I can select from a myriad of cars each fitting a particular utility and means, so parents would be able to select a product that fits their needs and means. The idea that a Ford Focus is inferior to a BMW 7 series is laughable. To a man of modest means the Ford Focus may be exactly what he needs, and correspondingly exactly what he can afford. And so the Ford Focus of education, one that includes "literacy and basic math" (The Three R's) may be just the thing that the poor need given their particular context.
  • The value of the service provided by a teacher is also contextual, and the best way to reflect this value is by a direct fee for service model, with parents paying a teacher.
  • All teachers are not created equal, and the best way to get excellence in teaching is to reward it. The best way to do that is through the profit motive. Teachers who can demonstrate their value will then command a great proportion of share and a great price for their services. This works at all levels.
  • And finally, the free-market does a better job with education at any level. Period.
The myth that education is too lofty and important to be left to commerce belies the evidence as scarce as it sometimes is. Education is important. And it is for that reason that it is exactly something which should be left to commerce.

Saturday, March 10, 2007

Article : Profit makes medicines cheaper

Richard Ralston, Director of Americans for Free Choice in Medicine has an op-ed in the Orange County Register on profit in medicine, "Profit makes medicines cheaper". I think the article bites off more than it can chew, and does not focus on articulating it's main point, but whenever someone argues publicly for profit, they should be read.

Wednesday, March 07, 2007

FCC Extortion Racket

From a February 26, 200 Wall Street Journal Article, "FCC May Try to Scrub Kids' TV"

Last week, Spanish-language broadcaster Univision Communications Inc. agreed in principle to pay an unusually steep $24 million fine for violating the Children's Television Act, which requires broadcasters to show three hours of educational programming a week, Federal Communications Commission officials said. In exchange, the FCC will approve Univision's sale to a consortium of private-equity groups for $12.3 billion. Univision declined to comment on the proposed consent
decree.

It's the largest fine assessed by the FCC against a company, far exceeding the $9 million fine slapped on Qwest Communications in 2004 for violating FCC rules and the $3.6 million indecency fine proposed against CBS and its affiliates last year for an episode of the crime drama "Without a Trace."


There is one word describing this action: extortion. It is illustrative of the type of arbitrary power that so-called government regulatory agencies exert and that is prominent in most instances where private-sector companies need to seek approvals for actions such as mergers. There is no statutory relationship between the Children's Television Act and the FCC's power to sign off on mergers in the communications industry. But it makes the connection by arbitrary fiat.

And the action is arbitrary. Does one know what particular statute will be used to hold up merger approval? Your guess is as good as the guess of the executives at Univision. As the article states, "The FCC has rarely taken action against broadcasters for not meeting educational requirements for kids' television." Now, however, it sees fit to levy it's largest fine in history over a statute that it has rarely enforced. That is the very definition of arbitrary.

America's Unfriendly Skies

In a piece that relates to my post on consolidation in the airline industry is this Wall Street Journal editorial arguing for more lasseiz faire in the same, including foreign ownership of domestic airlines.

Tuesday, February 06, 2007

Thoughts on "Thoughts on Music"

Steve Jobs publicly posted his essay Thoughts on Music today, advocating that the music industry drop DRM (digital rights management) requirements for online music sellers, such as Apple's iTunes. DRM software protects copyrights for music purchased electronically, and is viewed as necessary by music companies and as a difficult maintenance challenge by online music/software companies. I am usually intrigued by public relations announcements such as this, since they are meant as a broad statement to sway those who might have influence in the issue, say politicians for instance, or music consumers. After all, if he wanted to talk to the record companies, he could have done that privately. No, he wants to talk to you. So, let's put him in proper context.

First of all, let's recognize his position in all of this. iTunes is a channel for media content. By that I mean that Apple acts in cooperation with music producers to help them get their products to consumers. Retailers and distributors are other types of channels as well. The music companies can also be thought of as channels for the real producer which is the artist, but in this case since artists work under contract, let's consider the music companies as the primary producer. The thing to remember is that channels and producers don't necessarily have congruent interests. A producer worries about effects that impact all of their volume and profitability. Channels worry about the extent to which a producers products move through their specific channel, and their comparative advantage with other channel competitors.

Now, let's think about the basic issue at hand: copyrights. Copyright is important. It's a form of property rights, and property rights are the basis upon which innovations allow profits to flow to the innovators. They are a form of legal justice if you will. Open source advocates who demand that because they listen to music should be allowed to listen to it freely and in any manner they see fit are not advocates of capitalism. The copyright is owned by the author, and he is free to set whatever terms he deems fit as to the use of his copyrighted material. You as a consumer are free to enter into this agreement or not.

In this context, let's look at what Jobs is asking for and why he is petitioning you, and not the music companies directly. He makes several claims in his essay that are interesting to dissect once you understand the context.

First, Jobs claims that the problem with DRM is that because of the constant threat of hackers "any company trying to protect content using a DRM must frequently update it with new and harder to discover secrets". This is true, but what it means is that from a channel perspective is that online venues bear the cost of maintaining DRM. This is the equivalent to a retailer putting anti-theft precautions into its stores, and Jobs is complaining that such efforts cost him money.

Next, in analyzing three different scenarios, Jobs claims that the status quo in digital music sales does not have an effect on locking consumers into one music player or another, because most of the music on players isn't purchased online. I find this debatable. One need not have a majority of their music be proprietary in order for it to be enough of a hassle to switch formats that the average consumer is effectively deterred from switching. Also, it is probably music purchased more recently that is in proprietary formats and so a user is more attached to this music and values keeping it more than older music. For example, I buy 100% of my music online today, but I would guess that only 5% of the music on my player is proprietary. Why? Because I transferred 15 years worth of CD purchases to digital format when I got my player. I researched players extensively before I did this because I didn't want to have to take the extra time to convert newly purchased formats should I decide to change platforms in the future.

So if proprietary music does in fact effectively lock users into certain players, why would Jobs want to dispense with it? The answer lies in looking at Jobs' competitive advantage relative to his other online competitors. What does Jobs have that his competitors don't? A head start and strong brand recognition, and an integrated player / storefront. His competitors, especially Microsoft, have only recently attempted an exact duplicate of Apple's business model with Zune. In fact, Apple would stand to be the least impacted by a shift to open standards, relative to its competitors. This is true regardless of whether music companies are impacted by the move.

Job's next claim is that it doesn't believe it can license it's DRM to other online store fronts and players and maintain protection of it's suppliers' music. Yet, this doesn't matter to music companies, if they can get non-exclusive distribution agreements with key online stores. A music company simply wants to get its music distributed in as many stores as possible as long as each store protects. Again, it is Apple that stands to lose if other online stores copy its model and take business away from it, not the music company. It Apply cannot effectively license it's DRM then it does not participate in any way in other online stores revenue.

Finally, Jobs final claim is that most music, sold as CD, is unprotected and that piracy is therefore not prevented by selling the small fraction online under DRM. This is true, maybe today, but not necessarily in the future. More and more music is moving to online purchase, and certainly it would be easier to distribute electronic media than it was previously to copy CD's. Music companies are justified in looking for improved security in what is to be its dominant future market, even if that future market today experiences leakage from older markets. However once the music industry makes the decision to go open source, it will be almost impossible to go back. Thus it is in the music industry's interest to hold out for increased security in future markets until such time as it is absolutely sure that it cannot compete in any other way than open source.

This essay, taken in its true context, is a plea by Jobs to move in a direction that favors Apple's interests over those of its competitors, regardless of whether such a situation would be good for its suppliers, or the industry as a whole. Artists and music companies would be right to resist such a plea, and so should you.