Posts filed under ‘Microeconomy’
Conspicuous consumption: from Thornstein Veblen to Jumeirah Palm
What happens when a few people have too much money?
Thorstein Veblen (1857-1929) lived in a very different Earth than ours. But he’d already made that question. Like others before him, he thought of a new, emerging class that no one had identified before: the leisure class. Born in Norway and emigrated to the US, he came from a hard-working highly-successful family.
Think twice before spending: Thorstein Veblen is watching
In a sense, he shared something with my admired Schumpeter: he took an approach to reality that included not only the dismal science but also Anthropology, Psychology and Sociology. That way he wasn’t seen Economics as an isolated science, but interrelated with human evolution and human behaviour. Social changes would mean economical changes. Instincts would matter.
In The Theory of the Leisure Class he explores the origins of property. For Veblen the first form of ownership was the property of the woman by the man. That would be coherent with some ancestral practices like seizing women from defeated enemies as trophies. Later that form of ownership would extend to new forms such as marriage, slavery or finally the ownership of things.
He opposes to explain the pursue of wealth as an evolution of the fight for subsistence. Sure that is possible in a very early phase of development or in a scarcity situation. But if the resources are high enough, people do not fight for subsistence. (you do?… cos I don’t)
Most economists would say that, survival assured, people fight to rise their way of living. That’s reasonable too. But those that already have a higher standard don’t need to worry about that. What drives the lives of those that already have too much?
For it’s not enough to posses wealth, people crave for honour. And honour is not something you can share with yourself. Honour requires recognition. The wealth or power must become evident for others, so they can recognise it.
It’s funny how Veblen thinks about the hierarchy of needs half a century before Maslow made his in 1943
And high thinking would require a separation of menial tasks. We still think of it. The highest class is abhorred of manual labor. That way of thinking has been going on for ages. And it’s not about survival: it’s about differentiation.
In Veblen’s thoughts that would mean two simple concepts:
Conspicuous leisure, kind of symbolic work, not quite useful for the community, but that marks a status:
- Activities like taking long exhausting vacations and, most of all, bringing souvenirs back to all our relatives. Where’s the value of a souvenir? Which signal do we send?
- Why did the highest class have to work when they had serfs? They didn’t.
- Why did hunting survive when farming or animal domestication was far more productive? It still does.
- Couldn’t armies help with menial work in times of peace? They didn’t either.
- Don’t you know someone who’s work is highly symbolical but of little practical utility? You’ll find closer examples at work, but Veblen was thinking of government, war, sports, and devout observances.
Conspicuous consumption, waste of resources to display a higher status than others.
- Of work. Like the consumption of servant’s work, specially totally unproductive work. Is there a better way of displaying power than having a lot of people just wasting your time for you? Just being there for your unproductive whims, to maintain and increase your honour? Of course you’d say that the well off class didn’t have time for doing things themselves. Specially when they had so many obligations like clubs, sports, or even sewing circles. (While they had their clothes sewed by servants)
- Of goods. Certain rituals, or beverages, were initially reserved for the superior class, specially intoxicating ones and stimulators. Women would administer them. It would be manly to consume them, always resisting the temptation of excessive indulgence. It still is. Luxuries would be for masters, the more refined the better. Are consumers seeking excellence? Differenciation again and again in everyday life.
Scarcity or differenciation? luxury or waste of money?
In 1899 Veblen was already thinking of Jumeirah Palm. Time has passed, the planet has changed, but we haven’t.
Airlines corporate hunt: British Airways and TPG finally join forces to buy Iberia
Smart move from British Airways. The hunt has resumed and two hunters have made an alliance: Texas Pacific Group and British Airways will go together.
That’s a good idea because private equity can cooperate easily with the British airline’s knowledge support. And there are synergies: Iberia has what BA lacks: a good connection with America, specially Central and South America. And TPG has what BA lacks: money. Apax wouldn’t fit in the agreement, though.
British Airways has many shared codes with Iberia, plus a 10% stake in the company, and call options to a 27% more from Caja Madrid (10%), BBVA (7,3%), Logista (6,7%) and El Corte Inglés (3,1%). But British Airways’ shares have not been very optimistic lately, as you can see in the following graph:
BA in London Stock Exchange (blue) compared to Dow Jones Index (red), not too bright
(It’s not something about British Airways. EasyJet and RyanAir have been squeezing as much money from traveller’s pockets as they have been able to, but there’s a dead end right in front of them, and the Airline’s sector situation now is not that bright. Iberia and Alitalia are looking for buyers. Time for restructuring. But that’s not for today.)
Remember my last post on Iberia and why it had to keep being Spanish? Well, looks they’ve found the solution. TPG and BA would acquire a maximum share of 49% while the rest would be left for Spanish investors. They are also known: Vista Capital (which includes Banco de Santander and his old ally Royal Bank of Scotland), Ibersuizas and Quercus (a venture capital fund also participating in another low-cost Barcelona-based airline: Vueling). That way they can protect their exclusive international flying agreements signed with the Spanish government. (those kind of agreements that you can’t acquire in the free market). Here is the post: Iberia and its brides… where is the value?
So it looks like British Airways is trading handling victory to TPG over Apax (and partners Hemisferio and Torreal) with his call options, plus knowledge and synergies with his network for a bigger chunk of shares without spending money. All of that without having to renounce to international agreements signed by the Spanish government on behalf of a Spanish Iberia.
European real integration: British airports more Spanish and Spanish planes more British
Well done BA!
Spain buying cheap olive oil from Italy… shouldn’t it be the other way around?
I’ve had a busy days. Mondays are the worst. Always. The only thing good about mondays is that, once you begin doing things and before you realise, it’s already tuesday.
Today I’ve been meddling with many things. One of them was a group essay for a Spanish company that wants to export olive oil. I decided to contribute with a lot of statistical data and tried to get some conclusions.
Using the TARIC (Integrated Tariff for European Communities) code for olive oil: 1509, that you can find here, and searching in Import/Export databases from Spanish Chambers of Commerce here, it’s easy to find that Spain exported, last year, 1.778 million € in olive oil to the following countries:
Spain: exporting a lot of olive oil
Which is not surprising. Italy is the main market for olive oil exports. Being Spanish oil of better quality, and being Spanish brands less known than Italian ones, a big chunk of olive oil is exported to Italy, where it is repacked and exported again to third countries as an Italian export with an Italian brand. The US market is a good example: try to find Spanish oil. (Then, when you end up buying an Italian brand you end up carrying Spanish oil home.)
It’s a consequence of the rather recent opening of the Spanish economy to international markets. Spain as a brand is still not enough known. Fortunately, if you see series from previous years, Italy’s share of Spanish exports is less important as the country directly exports bigger quantities.
In any case, Spain leads the world’s exports of olive oil, with 1.778 million Euros. But, does it import olive oil too?
And the answer is yes: the biggest exporter also imports olive oil.
A 15% of the quantity exported… yes! Spain also imports olive oil. And surely they have learned the Italian lesson. Spain imports olive oil from Tunisia, Morocco, Syria… and surely repacks it, rises its price and sends it somewhere else. At least there’s a big chance that your Spanish oil is really Spanish, but no certainty at all.
But there is Italy too. Spain imports oil from Italy. I’ve crossed the data, relating volumes and values, and Spain exports oil to Italy more expensive than imports it!. In fact Spain pays more for Moroccan, Greek, Turkey or Jordan olive oil than for Italian oil. Funny.
You can see the prices in the following figures. Spain exports much more expensive than it imports. Fortunately.
Arbitrage: buy cheap, sell expensive. Olive oil too.
Lag in economics I: changes… but not so fast
I’ve been studying dynamic econometric models. Yes, that sounds scary. But that lead me to a deeper degree of understanding about economic reality (understanding the first and second derivatives, that is).
Let me explain. A dynamic econometric model is a model that, to predict a dependent value, takes into account the values of past periods of time.
Why is that interesting? Well, when you are meddling with economics you find several cases:
- In the macroeconomics IS/LM model where yields are related to consumption, investment and government spending, there is a multiplier between those values, that means that, for example, with increased government spending this money will spread into the system, to consumers, to investment and ultimately to a yield increase. There will be a multiplier because of the recursive interchange of money. Even though that can mean less investment by substitution effect, the long run will be better. That’s why government deficit can help overcome recessions.
- Or when you pour more money into the system (if you are a central bank, that’s for sure) then a part of this money will go into bank accounts, a part again into lenders, and another part into reserves. But the global quantity will be higher than what you have poured into the system. Another multiplier.
But these processes have two things in common. First of all, they share the fact that the initial change is increased in effect by a multiplier, so there is some kind of amplification. And they also share the fact that these increased effects do not happen instantly but by realimentation: there’s an initial increase that is a new input to a second increase, and the process goes on an on.
The process converges, that means that there’s a point of equilibrium which it goes closer to. And it is not a short run process, but takes time to see the change.
So when we are writing the equations of those processes we are assuming that everything happens instantaneously. And that’s untrue. As we care about economic magnitudes not only on a yearly basis but for shorter periods of time, we should devise more accurate ways to describe reality.
As an engineer I can also see it from another point of view. Recursive digital filters are used in digital signal processing. Given a response there are ways to find which way the filter must be. There you have tools like the z transform. In fact you can emulate all kinds of analogic filters just with the right digital signal processing device.
That will sound strange and far-fetched for most economists but, believe me, both techniques have a lot of things in common.
ABM-Amro: Can big companies become prey too?
A couple of days ago ABM-Amro was about to be acquired by Barclays, and both boards were happily posing for the press. In the meanwhile Barclays was getting ready 67 billion € and the Dutch authorities were very happy to know that the group would go on paying taxes at home.
But then Royal Bank of Scotland, Fortis and Grupo Santander counter offered 72 billion €. And they are supposed to be able to offer more.
But, what is it going to happen after the buy out? The first case would be just a clean old-fashioned absorption, but the second would need far more surgery. If the second group wins, they’ll end up splitting the prey into pieces, pieces big enough to be interesting, but small enough to be digested.
Same is happened with Spain’s Endesa. Instead of being absorbed by German E-On it will be finally split into two pieces: one chunk for E-On (the price to pay for their retreat) and a bigger chunk (a smaller Endesa) controlled by Enel (yes, Italian and it’s still part public) and Acciona, a Spanish construction group.
Looks like now companies hunt in packs. That way they can catch the bigger fish. In the end extensive surgery is needed and prey are completely transformed.
It had to happen some day. No big company is safe now.
House bubble… again. Time to burst already?
If you are one of the few people that read me (thank-you by the way) you’ll probably remember the post I wrote about the Spanish house bubble about to burst. Well, there are signs that its bursting is closer now.
In fact many European countries now fear that this burst could be contagious. Probably it will be.
Did I tell you about a constructor, Fernando Martin, and how he was paying above risk-free interest rates four times than what an American constructor would? Well, the markets are going down for real estate companies, and their shares are losing ground. Looks like there’s something changing, moving down.
For a country like Spain that has grown a lot based on house building, this is a big problem.
Many of these companies have been buying around: utilities, construction, airports. Many have just bought each other. Some with their own shares, but when that wasn’t enough, with fresh cash.
Where do you get fresh cash from when you need it? Well, institutional investors, banks… there are many ways. If you can do a leveraged buy out, or just go into debt, do it. Why would you pay with your own money when you can borrow at low rates and achieve higher returns? Sounds silly.
But there comes a time when you have to repay. And no gain comes without risk. Right now the prices may go down, but debt will stay the same. That means that companies will still need to sell at the same pace. Pressure to sell means pressuring the prices down.
But now there’s a wider gap between offer and demand, a gap still getting wider. Now it won’t be so easy to repay debt. The weak are in peril, with value going down and risk going up. That means trouble.
Astroc going up, up, up… and now down
Real state companies owe 250 billion € to the Spanish financial system. That is one fourth of the gross national product. The risk naturally spreads into banks. And they also had the risk of lending to subprime consumers, remember? Add both risks and the situation, naturally, gets more risky. Add the correlation between them and then it gets even more risky.
Nothing radical has changed from some days ago. Only investors mindsets. But investors are like that: either they hate you or they love you, sometimes enthusiastic, sometimes they just panic. No inbetweens.
But what do we need to see prices fall? Just a price-falling mindset. It’s all in our minds.
Do not panic yet. If real state companies have trouble to repay the banks still have the guarantees. They can still sell them. But in most cases the guarantees are their own plunging shares. They may be worth less than they owe, they can’t even be sold without pressuring prices down more. Ooopss.
(Fortunately, there’s more to Spain than the real state sector, and the Spanish financial sector is very strong. Moody’s still keeps our AAA… for now.)
Following Aristotle to Saint Thomas Aquinas: commerce and usury
I previously left the story with Aristotle and his admittance of domestic wealth management versus his rejection of personal enrichment per se, the modern idea of economics. (See Blackthumb’s great blog). But… what happened later? Let’s jump to the XIIIrd century…
In those days many would worry about being able to distinguish between the authentic values of God and the distorted inclinations of humans. There was an ongoing discussion about what was right or wrong, and what God wanted humans to do. Reason or faith, which to follow? Was nature a reflection of the divine reality? As in Plato, was what they could see just a shadow of a superior reality?
Averroes, an islamic spanish phylosopher, had his answer. He, who was known as the great comentator of Aristotle, asserted the separation between faith and rational knowledge. There was no incompatibility: religious knowledge and reason just followed different paths.
But averroism fell in disgrace. And with it the aristotelian point of view, heavily criticised by agustinism. The same fate had the separation between faith and reason, radically rejected and condemned by both muslims and christians. They were bad days for both reason and Aristotle.
And then there was San Tommaso d’Aquino, aka Saint Thomas Aquinas (1224-1274). Saint Thomas inherited both the aristotelian point of view and the defense of the ability of rational to operate in its own laws without leaving the frame of faith. That was because the mystery of God was incarnated in human language. Thus it was possible to derive new rules from those that existed as certain because they had been revealed by God. And as long as the previous were according to faith, the latter would be no matter how they were converted, ellaborated and transformated following the rules of rational activity.
Aquinas denied the possibility of money being productive. Following his reasoning, what had not been created by God but by humans and did not have the ability to reproduce, couldn’t be multiplied. It was an unnatural thing. That meant that what we know as interest was not justified but condemned. It was not possible to earn anything from lending money. Interest was usury. It still is, under Roman Law.
On the other hand that was totally coherent with Aristotle’s rejection of commerce. Of course that was a real problem in a society that desperately needed commerce to emerge from dark ages, that and also the ilegitimacy of accrued interest.
Fortunately there would be a way out of this, although it would still take a couple of centuries to get out of this mess. Mediterranean merchants -specially north Italians- not only would thrive on commerce -it would be the Renaissance-, but they would exchange foreign currency to be delivered at a future date.
The beginning of futures? Not yet. It would be a way to accrue interest for the lender without falling into usury and without actual trade of goods or foreign currency. They had invented the dry exchange.
Housing bubble: almost bursting… but not yet
Does anyone still don’t know about the housing bubble? Well, looks it has not bursted yet… but some signs are worringly clear that it will soon.
First of all: there is a bubble. Look at the rise of the prices for the last eight years: (source Mortgage Bankers Association)
The US are a good example. Prices have soared and house equity has been a great business. Well, as always, its a good business if you sell higher than you bought. And that means selling and buying, not just keeping or using.
So it might be possible that homeowners are all rich now. Or maybe they are not so rich as they owe a lot of money, and their home equity is leveraged. But any way: they have been feeling rich.
Worringly, interest rates have soared too. And they keep rising. And the prices have been so high and the gap between sellers and buyers been so wide that price rises have stopped. In some places even decreased.
It’s not that the bubble has bursted. In fact most price decreases are not in the most inflated areas, but just caused by the old and classic reasons: in places where economy is not buoyant, unemployment has rised, and not enough cash is flowing to worker’s pockets.
This graphic from Standard & Poor’s illustrates the end of the cycle. The green line are the price increases, the orange one the number of housing starts:
As you can see we are back to zero. Everything is possible from here. Even the vicious circle.
For instance: think about subprime mortgages. They have been given to people that have a larger risk of default. But they have been given extensively (20%). More buyers were needed to close the gap between offer and demand. Interest rates were very low, and defaults in their historic minimum. Economy was still flourishing and growing.
But now economy has changed. Well in fact it hasn’t changed, but the expectations have changed. Now, let’s adapt to the new expectations. Let’s stop having that risky business: let’s close the door to subprimes.
Looks like a good idea: less subprimes means less defaults. And less financial distress. It’s time to tighten the rope.
But that will mean widening the gap again. That will mean additional pressure down and lower prices. That will mean less richesse effect and less spending. That will mean less jobs, and that will mean more depressed areas. And, voilà, you have the vicious circle.
Because tightening the market for mortgages means tightening a natural exit for existing subprime mortgages: refinanciation. There’s an important percentage of house owners that need refinancing, specially among subprime owners. It’s a natural way to quit being subprime, either you get rich, either you transform your mortgage into some more bearable weight. But what if that door narrows? more defaults coming.
What will happen at the end of the year when prices won’t be stable at 0% but… I have a guess to make here… hmmm… let’s say -7%. You can see the tendency in the upper graph.
You say flatliner? Maybe… nah, I don’t believe so. Let the vicious circle begin.
Airbus and Boeing: would a monopoly be more efficient?
Airbus and Boeing are two tough rivals in competition for the world aircraft market. But, would that market benefit from a single player?
Polititians, of course, would say no. That’s why Airbus gets billions in development loans/funds from a few European governments. That’s the first thing that archrival and more experienced Boeing would say about Airbus. But what about NASA contracts and tax deferments on export from the US government? Looks like no one is playing fair.
But does the fairness always benefit efficiency? From a microeconomic point of view it seems clear that without all that covert financing neither company would survive. At least from the figures I have. And that would mean a monopoly in the aircraft market. Probably for Boeing, but that’s not the question. And probably that would also mean a better use of public money: no use at all.
The market of aircraft parts has benefited a lot from this anew competition. New players are entering the providers competition, i.e. chinese providers or eastern Europe providers. They wouldn’t stand a chance, or maybe not? Would that be a bad thing?
The fact that the parts market is increasingly efficient means that less efficiency is on the upper scale, hence the need for public money. Public money that derives into good externalities for third parties. Maybe even for third parties that are not giving away the public money needed. A form of development? Spreading knowledge that will strengthen the market? What about learning by doing?
What about future value? Air transportation market has been growing steadyly (qith one exception, you know). New environmental regulations mean more aircraft need to be renewed. Globalization means more competition, and at the same time, airline specialization means that aircrafts need to be increasingly personalized and adapted to all sort of profiles (i.e. low-cost profiles).
So it could be said that in fact governments are only financing discounting on future growth and positive externalities. That what today, in the name of market efficiency, would be a monopoly, won’t be when growth arrives, and wouldn’t need to be taking externalities into account. Maybe even this duopoly public-driven situation is helping growth by itself, creating a new market, and making it easier for airlines to grow. For the governmens implied, of course it means allocating resources from other areas but, even being those more efficient, could airplane making have more future? The “infant industry” justification.
As long as fuel doesn’t get more expensive, of course. But governments could also help with that. Would that make it different from an economic point of view?
I don’t really have an answer, just some thoughts. But when politics mix with economy, the figures are increasingly blurred and it gets harder to be a liberal. I’ll have to think more about it.
Aristotle and his double vision of economy
Looking back in time, there’s a point where “economy” begins as a way of managing the wealth of the house, for that’s the meaning of “oikos” (house) and “nemein” (administration). What is not clear at all is what was being administered was “wealth” in its meaning nowadays or just a restricted concept of it.
Aristotle was born in 322BC. In an era of isolated greek cities, many of them in war. Economy was based on the production of slaves and women. The first as “properties that could talk”, the latter as beings that only had power by delegation, restricted to the care of the house and children.
In those greek cities, common good was an important concept, much more important than individual rights. The pursuing of wealth was still something not accepted by society for the real wealth was measured by the size of owned land, not by any other means. Those societies needed resources for protection and needed a way to make decisions: politics.
Politics were managed by middle class. Middle class were those with enough resources to participate in political life for free. There still was a clear separation between politics and money, and corruption was still a few decades away of being born in Athens.
But most interesting, Aristotle already described four main objectives in life:
- Pursuing honour and public recognition
- Pure contemplation of truth
- Hedonism: accumulating and tasting different pleasures
- Accumulating wealth
The fourth was the despised one. It was perceived as a threat for the city and a nonsense because it meant accumulating resources with no use for them. That meant depriving the community of those resources.
Aristotle ended up differenciating two kinds of economy:
- oikonomikos, as I first described, related to the administration of the house, the acceptable one
- chrematisike, or commerce for profit, the art of money making
The difference between the two, moral difference between what’s right and what’s wrong, has labeled Aristotle as “enemy of business”. In fact he was. He labeled the participants of this trading activity as “parasites of society” and thought of them as outsiders not rightful citizens.
Many of the christian traditions followed Aristotle’s path, specially protestantism. Normative economy was born, studying interchanges and economy from the ethics point of view. Difference between the concepts of price and value was grasped -but later forgoten for a long time-, and theories where accumulation of resources had no sense apart from a future use were created.
It’s not that Aristotle abhorred wealth. He recognised the necessity of a sensible amount of it. That’s the way for the middle class to participate in politics for free -being at the same time able to work less hours-. He understood that it was not possible to make good deeds without resources.
It wasn’t until Adam Smith that chrematisike was considered again as a useful resource for the whole of society. But that’s another story.
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