Tag Archives: Economics

The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger by Marc Levinson

Summary

  1. Marc Levinson discusses the history of the container, the main characters behind it, and the ramifications its introduction and adoption have had on global trade. The basic concept of the container was that cargo could move seamlessly among trains, trucks, and ships.

Key Takeaways

  1. The Box, I hope, has contributed to public understanding that inadequate port, road, and rail infrastructure can cause economic harm by raising the cost of moving freight.
  2. Malcom McLean’s real contribution to the development of containerization, in my view, had to do not with a metal box or a ship, but with a managerial insight. McLean understood that transport companies’ true business was moving freight rather than operating ships or trains. That understanding helped his version of containerization succeed where so many others had failed.
  3. What is it about the container that is so important? Surely not the thing itself. A soulless aluminum or steel box held together with welds and rivets, with a wooden floor and two enormous doors at one end: the standard container has all the romance of a tin can. The value of this utilitarian object lies not in what it is, but in how it is used. The container is at the core of a highly automated system for moving goods from anywhere, to anywhere, with a minimum of cost and complication on the way. The container made shipping cheap, and by doing so changed the shape of the world economy. Low shipping costs helped make capital even more mobile, increasing the bargaining power of employers against their far less mobile workers. In this highly integrated world economy, the pay of workers in Shenzhen sets limits on wages in South Carolina, and when the French government ordered a shorter workweek with no cut in pay, it discovered that nearly frictionless, nearly costless shipping made it easy for manufacturers to avoid the higher cost by moving abroad.
  4. As ship lines built huge vessels specially designed to handle containers, ocean freight rates plummeted. And as container shipping became intermodal, with a seamless shifting of containers among ships and trucks and trains, goods could move in a never-ending stream from Asian factories directly to the stockrooms of retail stores in North America or Europe, making the overall cost of transporting goods little more than a footnote in a company’s cost analysis. Transport efficiencies, though, hardly begin to capture the economic impact of containerization. The container not only lowered freight bills, it saved time. Quicker handling and less time in storage translated to faster transit from manufacturer to customer, reducing the cost of financing inventories sitting unproductively on railway sidings or in pierside warehouses awaiting a ship. The container, combined with the computer, made it practical for companies like Toyota and Honda to develop just-in-time manufacturing, in which a supplier makes the goods its customer wants only as the customer needs them and then ships them, in containers, to arrive at a specified time. Such precision, unimaginable before the container, has led to massive reductions in manufacturers’ inventories and correspondingly huge cost savings. Retailers have applied those same lessons, using careful logistics management to squeeze out billions of dollars of costs.
  5. When transport costs are high, manufacturers’ main concern is to locate near their customers, even if this requires undesirably small plants or high operating costs. As transportation costs decline relative to other costs, manufacturers can relocate first domestically, and then internationally, to reduce other costs, which come to loom larger. Globalization, the diffusion of economic activity without regard for national boundaries, is the logical end point of this process. As transport costs fall to extremely low levels, producers move from high-wage to low-wage countries, eventually causing wage levels in all countries to converge. These geographic shifts can occur quickly and suddenly, leaving long-standing industrial infrastructure underutilized or abandoned as economic activity moves on.
  6. The solution to the high cost of freight handling was obvious: instead of loading, unloading, shifting, and reloading thousands of loose items, why not put the freight into big boxes and just move the boxes?
  7. Interest in such a remedy was widespread. Shippers wanted cheaper transport, less pilferage, less damage, and lower insurance rates. Shipowners wanted to build bigger vessels, but only if they could spend more time at sea, earning revenue, and less time in port. Truckers wanted to be able to deliver to and pick up from the docks without hour upon hour of waiting. Business interests in port cities were praying for almost anything that would boost traffic through their harbors. Yet despite all the demands for change, and despite much experimentation, most of the industry’s efforts to improve productivity centered on such timeworn ideas as making drafts heavier so that longshoremen would have to work harder. No one had found a better way to ease the gridlock on the docks. The solution came from an outsider who had no experience with ships.
  8. It was easy enough to conclude that containers would change the business, but it was not obvious that they would revolutionize it. Containers, said Jerome L. Goldman, a leading naval architect, were “an expedient” that would do little to reduce costs. Many experts considered the container a niche technology, useful along the coast and on routes to U.S. island possessions, but impractical for international trade. The risk of placing multimillion-dollar bets on what might prove to be the wrong technology was high.
  9. These two unrelated developments—the rise of New York, the neglect of Tampa and Mobile—revealed the economics that would affect seaports as container shipping grew. For ports, capturing container traffic was going to be expensive, requiring investments out of all proportion to what had come before. For ship lines, the days when vessels meandered along the coast, calling at every port in search of cargo, would soon be over. Every stop would mean tying up an expensive containership that could generate revenue and profit only when it was on the move. Only ports that could be relied on for large amounts of freight were worth a visit, and all others would be served by truck or barge. By the late 1950s, the lesson for public officials already was clear. As container shipping expanded, maritime traffic would be drawn to a small number of very large ports. Many established centers of maritime commerce would no longer be needed, and ports would have to compete to be among the survivors.
  10. Behind this frenzied expansion of long-neglected ports was the emergence of an entirely new line of thought about economic growth. Manufacturing was almost universally regarded as the bedrock of a healthy local economy in the 1960s, and much of the value of a port, aside from jobs on the docks, was that transportation-conscious manufacturers would locate nearby. As early as 1966, though, public officials in Seattle were sensing that their remote city, with little industry, might be able to develop a new economy based on distribution rather than on factories. The lack of population close at hand would be no obstacle; Seattle could become not merely a local port for western Washington but the center of a distribution network stretching from Asia to the U.S. Midwest. “Commodity distribution has grown out of the dependent sector to link production and consumption,” port planner Ting-Li Cho wrote presciently. “It has become an independent sector that, in return, determines the economy of production and consumption.
  11. The container contributed to a fundamental shift in the geography of British ports. In the precontainer era, London and Liverpool had dominated Britain’s international trade, their docks and warehouses filled with goods headed to or from factories located nearby. The two ports each loaded one-quarter of Britain’s exports, with no other port handling more than 5 percent. The container stripped Liverpool of its competitive advantages. Its costs per ton of cargo were too high, and it was on the wrong side of an island that was reorienting its trade toward continental Europe.
  12. “Unless a container terminal is available in Hong Kong to serve these ships the trading position of the Colony will be affected detrimentally.” And no government anywhere was more aggressive in preparing for the container age than Singapore’s. Immediately upon independence, the new government launched a crash effort to build the economy by drawing foreign investment, especially in manufacturing. Amid a general government crackdown on dissent, the Port of Singapore Authority was able to slash the size of longshore gangs from twenty-seven to twenty-three, institute a second shift, and boost by half the amount of cargo handled per man-hour. It put forth a plan in 1965 to build four berths for conventional ships at a site known as the East Lagoon, which had a breakwater but no major docks. Within months, the plan was scrapped. The containerships that were about to cross the Atlantic had captured the interest of port officials. They announced in 1966 that instead of conventional berths, they would build a port for containers. Singapore’s strategy was to use containers to become the commercial hub of Southeast Asia. With a $15 million World Bank loan covering nearly half the cost, the port authority began work on a terminal at which long-distance vessels from Japan, North America, and Europe could hand off containers to smaller ships serving regional ports. Singapore’s containerport grew beyond all expectations. In 1971, before the new terminal opened, the Port of Singapore Authority forecast 190,000 containers after a decade in operation. Instead, it handled more than a million boxes in 1982 and was the world’s sixth-largest containerport. By 1986, Singapore had more container traffic than all the ports of France combined. In 1996, more containers passed through Singapore than through Japan. In 2005 Singapore became the world’s largest port for general cargo, pulling ahead of Hong Kong, and some 5,000 international companies were using the island-state as a warehousing and distribution hub. By 2014, the equivalent of 17 million truck-sized containers moved across Singapore’s docks and the government-owned port management company had itself become a multinational enterprise, operating container terminals around the world and turning Singapore’s logistical know-how into a major export—testimony to the power of transportation to reshape the flow of trade.
  13. The launch of so many vessels resulted in a quantum jump in capacity. The basic economics of containerization dictated as much. Once a ship line had made the decision to introduce containerships on a particular route, other carriers in the trade normally followed swiftly lest they be left behind. The capital-intensive nature of container shipping put a premium on size; quite unlike breakbulk shipping, in which an owner of “tramp” ships could eke out a profit picking up freight wherever it could be found, a container line needed enough ships, containers, and chassis to run a high-frequency service between major ports on a regular schedule. When a ship line decided to enter a trade, it had to do so in a large way—which meant that on every major route, several competitors were entering with several vessels apiece. Capacity on the largest international routes increased fourteen times over between 1968 and 1974.
  14. United States Lines would achieve what it took to succeed in container shipping: scale. Scale was the holy grail of the maritime industry by the late 1970s. Bigger ships lowered the cost of carrying each container. Bigger ports with bigger cranes lowered the cost of handling each ship. Bigger containers—the 20-foot box, shippers’ favorite in the early 1970s, was yielding to the 40-footer—cut down on crane movements and reduced the time needed to turn a vessel around in port, making more efficient use of capital. A virtuous circle had developed: lower costs per container permitted lower rates, which drew more freight, which supported yet more investments in order to lower unit costs even more. If ever there was a business in which economies of scale mattered, container shipping was it.
  15. The equation was simple: the bigger the port, the bigger the vessels it could handle and the faster it could empty them, reload them, and send them back out to sea. Bigger ports were likely to have deeper berths, more and faster cranes, better technology to keep track of all the boxes, and better road and rail services to move freight in and out. The more boxes a port was equipped to handle, the lower its cost per box was likely to be. As one study concluded bluntly, “Size matters.”
  16. The true importance of the revolution in freight transportation would be found not in its effect on ship lines and dockworkers, but later, as the impact of containerization resonated among the hundreds of thousands of factories and wholesalers and commodity traders and government agencies with goods to ship. For most shippers, except perhaps government agencies, the cost of transporting goods was decisive in determining what products they would make, where they would manufacture and sell them, and whether importing or exporting was worthwhile. The container would reshape the world economy only when it changed shippers’ costs in a significant way.
  17. Many nonfreight costs undoubtedly fell with the growth of container shipping. Packing full containers at the factory eliminated the need for custom-made wooden crates to protect merchandise from theft or damage. The container itself served as a mobile warehouse, so the traditional costs of storage in transit warehouses fell away. Cargo theft dropped sharply, and claims of damage to goods in transit fell by up to 95 percent; after insurers were persuaded that container shipping in fact had fewer property losses, premiums fell by up to 30 percent. Faster ships and reductions in the time needed to load and unload vessels at ports resulted in lower costs for inventory in shipment. As Malcom McLean had understood back in 1955, it is the sum of these costs, not just the published rate of a ship line or railroad, that matters to shippers.
  18. Until then, vertical integration was the norm in manufacturing: a company would obtain raw materials, sometimes from its own mines or oil wells; move them to its factories, sometimes with its own trucks or ships or railroad; and put them through a series of processes to turn them into finished products. As freight costs plummeted starting in the late 1970s and as the rapid exchange of cargo from one transportation carrier to another became routine, manufacturers discovered that they no longer needed to do everything themselves. They could contract with other companies for raw materials and components, locking in supplies, and then sign transportation contracts to assure that their inputs would arrive when needed. Integrated production yielded to disintegrated production. Each supplier, specializing in a narrow range of products, could take advantage of the latest technological developments in its industry and gain economies of scale in its particular product lines. Low transport costs helped make it economically sensible for a factory in China to produce Barbie dolls with Japanese hair, Taiwanese plastics, and American colorants, and ship them off to eager girls all over the world. These possibilities
  19. The improvement in logistics shows up statistically in reduced inventory levels. Inventories are a cost: whoever owns them has had to pay for them but has yet to receive money from selling them. Better, more reliable transport has permitted companies to obtain goods closer to the time they need them, instead of weeks or months in advance, tying up less money in goods sitting uselessly on warehouse shelves. In the United States, inventories began falling in the mid-1980s, as the concepts of justin-time manufacturing took root. Manufacturers such as Dell and retailers such as Wal-Mart Stores have taken the concept to extremes, designing their entire business strategies around moving goods from factory floor to customer with minimal time in between. In 2014, inventories in the United States were perhaps $1.2 trillion lower than they would have been had they stayed at the level of the 1980s, relative to sales. Assume that the money needed to finance those inventories would have been borrowed at, say, 8 percent, and inventory reductions saved U.S. businesses roughly $100 billion per year.
  20. Container shipping thrives on volume: the more containers moving through a port or traveling on a ship or train, the lower the cost per box. Places with lower demand or poorer infrastructure will face higher transport costs and will be far less attractive manufacturing sites for the global market. In the 1970s and 1980s, when many U.S. industrial centers were dying, Los Angeles thrived as a factory location because it was home to the nation’s busiest containerport, and Los Angeles thrived as a port because it was well located to handle import volume from Asia, not just for California, but for the entire United States. The Pacific Rim became the world’s workshop for consumer goods, in good part, because large ports for containers gave it some of the world’s lowest shipping costs:
  21. The container has enabled logistics centers such as these to prosper by adding value to global supply chains, capturing jobs that were once performed elsewhere, or not at all.
  22. Malcom McLean’s genius was acknowledged unanimously: almost everyone save the dockworkers’ unions thought that putting freight into containers was a brilliant concept. The idea that the container would cause a revolution in shipping, though, seemed more than a little far-fetched. At best, the container was expected to help ships recover a tiny share of the domestic freight business and to benefit Hawaii and Puerto Rico. Truckers ignored it. Railroads shunned it. Even as ship lines talked up the container, most of them treated it as an adjunct to the business they knew, just another one of the many shapes and sizes of cargo that they were accustomed to storing in their holds. Labor was no more prescient.
  23. Whether containerships and containerports have reached their maximum efficient size, or even larger and costlier ships and ports could give rise to yet more economies of scale, making it still cheaper and easier to move goods around the globe, is a question of considerable consequence for the world economy.

What I got out of it

  1. Amazing how big of an impact the simple container had – lowering transportation costs by orders of magnitude which reshaped the global economy, leading to globalization, and cheaper and better products for everyone due to specialization.

Increasing Returns and Path Dependence in the Economy by Brian Arthur

Summary

  1. The idea of increasing returns has come up every few decades but Brian Arthur’s precise and fully-modeled papers caused us to clearly understand what kinds of models have what kinds of implications. One outstanding characteristic of Arthur’s viewpoint is emphatically dynamic in nature. Learning by using or doing plays an essential role, as opposed to static examples of returns to scale (those based on volume-area relations). The object of study is a history. Another distinctive feature of most of the work is its stochastic character. This permits emphasis on the importance of random deviations for long-run tendencies. Other tendencies include the multiplicity of possible long-run states, depending on initial conditions and on random fluctuations over time, and the specialization (in terms of process or geographical location) in an outcome achieved. Increasing returns may also serve as a reinforcement for early leading positions and so act in a manner parallel to more standard forms of increasing returns. A similar phenomenon occurs even in individual learning, where again successes reinforce some courses of action and inhibit others, thereby causing the first to be used more intensively, and so forth. There are in all of these models opposing tendencies, some toward achieving an optimum, some toward locking in on inefficient forms of behavior. 

 Key Takeaways

  1. The papers here reflect two convictions I have held since I started work in this area. The first is that increasing returns problems tend to show common properties and raise similar difficulties and issues wherever they occur in economics. The second is that the key obstacle to an increasing returns economics has been the “selection problem” – determining how an equilibrium comes to be selected over time when there are multiple equilibria to choose from. Thus the papers here explore these common properties – common themes – of increasing returns in depth. And several of them develop methods, mostly probabilistic, to solve the crucial problem of equilibrium selection. 
  2. Arthur studied electrical engineering so was vaguely familiar with positive feedback already and became more intrigued when he read about the history of the discovery of the structure of DNA and read whatever he could about molecular biology and enzyme reactions and followed these threads back to the domain of physics. In this work, outcomes were not predictable, problems might have more than one solution, and chance events might determine the future rather than be average away. The key to this work, I realized, lay not in the domain of the science it was dealing with, whether laser theory, or thermodynamics, or enzyme kinetics. It lay in the fact that these were processes driven by some form of self-reinforcement, or positive feedback, or cumulative causation – processes, in economics terms that were driven by nonconvexities. Here was a framework that could handle increasing returns. 
    1. Great discoveries tend to come from outside the field 
  3. Polya Process – path-dependent  process in probability theory 
  4. In looking back on the difficulties in publishing these papers, I realize that I was naive in expecting that they would be welcomed immediately in the journals. The field of economics is notoriously slow to open itself to ideas that are different. The problem, I believe is not that journal editors are hostile to new ideas. The lack of openness stems instead from a belief embedded deep within our profession that economics consists of rigorous deductions based on a fixed set of foundational assumptions about human behavior and economic institutions. If the assumptions that mirror reality are indeed etched in marble somewhere, and apply uniformly to all economics problems, and we know what they are, there is of course no need to explore the consequences of others. But this is not the case. The assumptions economists need to use vary with the context of the problem and cannot be reduced to a standard set. Yet, at any time in the profession, a standard set seems to dominate. I am sure this state of affairs is unhealthy. It deters many economists, especially younger ones, from attempting approaches or problems that are different. It encourages use of the standard assumptions in applications where they are not appropriate. And it leaves us open to the charge that economics is rigorous deduction based upon faulty assumptions. At this stage of its development economics does not need orthodoxy and narrowness; it needs openness and courage. 
  5. I did not set out with an intended direction but if I have had a constant purpose it is to show that transformation, change, and messiness are natural in the economy. The increasing-returns world in economics is a world where dynamics, not statics, are natural; a world of evolution rather than equilibrium; a world or probability and chance events. Above all, it is a world of process and pattern change
  6. Positive Feedbacks in the Economy
    1. Diminishing returns, what conventional economic theory is built around, imply a single economic equilibrium point for the economy, but positive feedback – increasing returns – makes for many possible equilibrium points. There is no guarantee that the particular economic outcome selected from among the many alternatives will be the “best” one. Furthermore, once random economic events select a particular path, the choice may become locked-in regardless of the advantages of the alternatives
    2. Increasing returns do not apply across the board – agriculture and mining (resource-based portions) – are subject to diminishing returns caused by limited amounts of fertile land or high quality deposits. However, areas of the economy which are knowledge-based are largely subject to increasing returns. Even the production of aircraft is subject to increasing returns – it takes a large initial investment but each plane after that is only a fraction of the initial cost. In addition, producing more units means gaining more experience in the manufacturing process and achieving greater understanding of how to produce additional units even more cheaply. Moreover, experience gained with one product or technology can make it easier to produce new products incorporating similar or related technologies. Not only do the costs of producing high-technology products fall as a company makes more of them, but the benefits of using them increase. Many items such as computers or telecommunications equipment work in networks that require compatibility; when one brand gains a significant market share, people have a strong incentive to buy more of the same product so as to be able to exchange information with those using it already. 
    3. Timing is important too in the sense that getting into an industry that is close to being locked in makes little sense. However, early superiority does not correlate with long term fitness 
    4. Like punctuated equilibrium, most of the time the perturbations are averaged away but once in a while they become all important in tilting parts of the economy into new structures and patterns that are then preserved and built on in a fresh layer of development 
  7. Competing technologies, increasing returns, and lock-in by historical events 
    1. There is an indeterminacy of outcome, nonergodicity (path dependence where small events cumulate to cause the systems to gravitate towards that outcome rather than others). There may be potential inefficiency and nonpredictability. Although individual choices are rational, there is no guarantee that the side selected is, from any long term viewpoint, the better of the two. The dynamics thus take on an evolutionary flavor with a “founder effect” mechanism akin to that in genetics 
  8. Path dependent processes and the emergence of macrostructure 
    1. Many situations dominated by increasing returns are most usefully modeled as dynamic processes with random events and natural positive feedbacks or nonlinearities. We call these nonlinear Polya processes and show that they can model a wide variety of increasing returns and positive feedback problems. In the presence of increasing returns or self reinforcement, a nonlinear Polya process typically displays a multiplicity if possible asymptotic outcomes. Early random fluctuations cumulate and are magnified or attenuated by the inherent nonlinearities of the process. By studying how these build up as the dynamics of the process unfold over time, we can observe how an asymptotic outcomes becomes “selected” over time 
    2. Very often individual technologies show increasing returns to adoption – the more they are adopted the more is learned about them; in then the more they are improved, and the more attractive they become. Very often, too, there are several technologies that compete for shares of a “market” of potential adopters 
  9. Industry location patterns and the importance of history 
    1. This study indeed shows that it is possible to put a theoretical basis under the historical-accident-plus-agglomeration argument (mostly arbitrary location for determining where a city is established but then more people flock to it, it receives more investment, more buildings come up, etc. which leads to agglomeration and increasing returns).
  10. Information Contagion
    1. When a prospective buyer is making purchasing decisions among several available technically-based products, choosing among different computer workstations, say, they often augment whatever publicly available information they can find by asking previous purchasers about their experiences – which product they chose, and how it is working for them. This is a natural and reasonable procedure; it adds information that is hard to come by otherwise. But it also introduces an “information feedback” into the process whereby products compete for market share. The products new purchasers learn about depend on which products the previous purchasers “polled” or sampled and decided to buy. They are therefore likely to learn more about a commonly purchased product than one with few previous users. Hence, where buyers are risk-averse and tend to favor products they know more about, products that by chance win market share early on gain an information-feedback advantage. Under certain circumstances a product may come to dominate by this advantage alone. This is the information contagion phenomenon
  11. Self-Reinforcing Mechanisms in Economics
    1. Dynamical systems of the self-reinforcing or autocatalytic type – systems with local positive feedbacks – in physics, chemical kinetics, and theoretical biology tend to possess a multiplicity of asymptotic states or possible “emergent structures”. The initial starting state combined with early random events or fluctuations acts to push the dynamics into the domain of one of these asymptotic states and thus to “select” the structure that the system eventually “locks into”. 
    2. Self-reinforcing mechanisms are variants of or derive from four generic sources:
      1. Large set up or fixed costs (which give the advantage of falling unit costs to increased output)
      2. Learning effects (which act to improve products or lower their cost as their prevalence increases)
      3. Coordination effects (which confer advantages to “going along” with other economic agents taking similar action)
      4. Self-reinforcing expectations (where increased prevalence on the market enhances beliefs of further prevalence)
    3. Besides these 4 properties, we might note other analogies with physical and biological systems. The market starts out even symmetric, yet it ends up asymmetric: there is “symmetry breaking.” An “order” or pattern in market shares “emerges” through initial market “fluctuations.” The two technologies compete to occupy one “niche” and the one that gets ahead exercises “competitive exclusion” on its rival. And if one technology is inherently superior and appeals to a larger proportion of purchasers, it is more likely to persist: it possesses “selectional advantage.”
    4. Some more characteristics: multiple equilibria (multiple “solutions” are possible but the outcome is indeterminate, not unique and predictable); possible inefficiency, lock-in, path dependence
    5. We can say that the particular equilibrium is locked in to a degree measurable by the minimum cost to effect changeover to an alternative equilibrium. In many economic systems, lock-in happens dynamically, as sequential decisions “groove” out an advantage that the system finds it hard to escape from. Exiting lock-in is difficult and depends on the degree to which the advantages accrued by the inferior “equilibrium” are reversible or transferable to an alternative one. It is difficult when learning effects and specialized fixed costs are the source of reinforcement. Where coordination effects are the source of lock-in, often advantages are transferable. As long as each user has certainty that the others also prefer the alternative, each will decide independently to “switch”. Inertia must be overcome though because few individuals dare change in case others do not follow
  12. Path Dependence, Self-Reinforcement, and Human Learning
    1. There is a strong connection between increasing returns mechanisms and learning problems. Learning can be viewed as competition among beliefs or actions, with some reinforced and others weakened as fresh evidence and data are obtained. But as such, the learning process may then lock-in to actions that are not necessarily optimal nor predictable, by the influence of small events
    2. What makes this iterated-choice problem interesting is the tension between exploitation of knowledge gained and exploration of poorly understood actions. At the beginning many actions will be explored or tried out in an attempt to gain information on their consequences. But in the desire to gain payoff, the agent will begin to emphasize or exploit the “better” ones as they come to the fore. This reinforcement of “good” actions is both natural and economically realistic in this iterated-choice context; and any reasonable algorithm will be forced to take account of it. 
  13. Strategic Pricing in Markets and Increasing Returns
    1. Overall, we find that producers’ discount rates are crucial in determining whether the market structure is stable or unstable. High discount rates damp the effect of self-reinforcement and lead to a balanced market, while low discount rates enhance it and destabilize the market. Under high discount rates, firms that achieve a large market share quickly lose it again by pricing high to exploit their position for near-term profit. And so, in this case the market stabilizes. Under low discount rates, firms price aggressively as they struggle to lock in a future dominant position; and when the market is close to balanced shares, each drops its price heavily in the hope of reaping future monopoly rents. The result is a strong effort by each firm to “tilt” the market in its favor, and to hold it in an asymmetric position if successful. And so, in this case strategic pricing destabilizes the market
    2. The simple dynamics and stochastic model of market competition analyzed in this paper reveals striking properties. First, positive feedback or self-reinforcement to market share may result in bistable stationary distributions with higher probabilities assigned to asymmetric market shares. The stronger the positive feedback, the lower the probability of passing from the region of relative prevalence of one product to that of the other. Second, when producers can influence purchase probabilities by prices, in the presence of positive feedback, optimal pricing is highly state-dependent. The producers struggle for market shares by lowering prices, especially near pivot states with balanced shares. 

 What I got out of it

  1. Influential read discussing self-reinforcement, lock-in, increasing returns in knowledge-based economies/industries, path dependence, and more. Extremely applicable for business, investing, economics, learning, and more. A great mental model to have in your toolbox

How Asia Works: Success and Failure in the World’s Most Dynamic Regions by Joe Studwell

Summary

  1. This book is about how fast or not economic transformation is achieved. It argues there are 3 interventions the government can take to influence this process: maximize output from agriculture with highly intensive household farming (pushing up yields and outputs to its highest level which primes demands for goods and services), direct investment and entrepreneurs towards export-oriented manufacturing as it makes use of the limited skills of labor by working with machines and technology (subsidies should incentivize spending in technology and manufacturing), and interventions in the financial sector to focus capital on intensive small scale agriculture and manufacturing development. The state’s role is to keep money targeted at a development strategy which gets the highest rate of technological learning, giving the highest rate of return, and helping the country grow as sustainably as possible, improving the lives and outcomes of everyone .

Key Takeaways

  1. Agricultural
    1. Agriculture is the place to start with up-and-coming countries because the vast majority of their people are tied to the land. Structuring incentives so that these people can prosper creates the foundation for further economic success 
    2. By approximately evenly dividing up the land amongst the peasants and incentivizing a maximization of output (rather than profit), yields go through the roof which helped pay and feed these families. It allowed everyone to compete on an approximately equal footing and everyone believed they had a chance st success – which they did. This “gardening” approach is the most appropriate way to think about and structure agricultural societies early on as it can make full use of all the available labor. Surprisingly, these smaller plots owned by the farmers had far greater yields than many plantations – busting the myth of efficiency in large scale agricultural operations
    3. The political elite tend to be out of touch with the agricultural peasants and therefore undervalue and under-appreciate their power and ability to help the economy 
    4. If you want industrialization, first fix agriculture
    5. Even a total outsider can tell the difference between a plot of land tended by an owner vs. a tenant
    6. A consistent application of these policies across different cultures and regions is a stark reminder that geography is not destiny 
    7. Farmers laid the foundation for industrialization and their household savings provided the base to build factories and later the market for the goods these factories made. Taiwan is the prime example in this case as many factories were built in rural areas and many farmers became industrial entrepreneurs. Indonesia and the Philippines are the negative examples – they nationalized land before the farmers could build up wealth and plantation inefficiency took hold. In addition, loopholes in policies so the rich could amass massive land holdings, put the poor at a disadvantage and worsened conditions
    8. Besides owning the small fields, the farmers need the extension, marketing, and credit to progress 
    9. As rural laborers begin moving into higher paying industrial and service jobs, farming needs to rebalance from productivity towards profitability – shifting towards more mechanized farms away from gardening plots. The countries will need to specialize at this point, moving away from farm protection and subsidies and to a niche they can compete in. This shifts money to this area and gives other poor countries the chance to follow the same playbook 
  2. Manufacturing 
    1. If there is one thing economic history can teach us is that there are no economic policies or laws which are sound forever 
    2. Manufacturing helps local people learn skills and to leverage the machines which they initially import, increasing productivity. Local entrepreneurs know the local market but they must compete with international firms in order to continue improving and to survive long-term without protection 
    3. Government must incentivize – through protection and subsidy – their rural entrepreneurs so they can get into large scale manufacturing rather than service industries at this phase. They must have export discipline – proving that their goods are competitive on a global stage and thus merit subsidies to grow.
    4. The government shouldn’t pick winners as much as weed out losers. South Korea did this which is why they ended up with one or two massive companies in each sector without explicit state investment or control. Protectionism hurts in the short term but helps economies evolve and it’s people learn useful skills and in the long term is beneficial
    5. Growing economies typically start industrialization with textiles later moving on to steel, shipbuilding, food stuffs, petro-chemicals, and eventually cars other heavy industry
    6. While Taiwan what is the exemplar in land redistribution, South Korea took over as the exemplar of industrialization – setting up their entrepreneurs to have to compete with international markets and companies by providing enough subsidy and protection to let them grow, learn, and thrive
    7. It is interesting to look in hindsight that Taiwan, South Korea, and Japan accomplish their amazing feats with no, or at least very few, trained economists. They simply followed the model of early America and later Germany 
    8. Government must not ask entrepreneurs to innovate for moral reasons. Rather they must accept and incentivize their animal spirits so that they can innovate, industrialize, and develop the country as is needed for their own benefit and for the benefit of all
    9. More than ever, firms are able to flourish if they have the right state industrialization policies in place. Hyundai was able to flourish and become one of the world’s most successful car manufacturers from an unpromising start and a family with no automotive experience thanks to the favorable Korean policies 
    10. The goal is technological learning which hopefully leads to internal, domestic innovation. While land reform and infant industry regulations are difficult, there are no better options. Technical and technological progress equates to economic progress and history has shown that these difficult but necessary steps must be taken 
    11. Big business is incredibly important. There are smaller countries with big firms which have gotten rich but never the other way around. However, government must continuously restrain their entrepreneurs or else you end up with oligarchs like in Russia or SE Asia
  3. Financial
    1. Bank deregulation and removal of capital controls too early hurt developing economies such as Thailand or Indonesia. The agricultural and industrial sectors must be ready before these financial policies are enacted. Several different monetary and fiscal policy approaches have led to success but they all had the right policies, pointing at the right targets 
    2. In the Philippines, private banks would lend to the rich entrepreneurs at favorable terms which of course help them but didn’t help the country develop at all. However, ultimately what led to the downfall of economic collapse of the Philippines was their lack of export discipline which would have provided them with export loop feedback so that they could continuously improve and better compete on a global stage – improving their technical know-how across the country
    3. Korea and the Philippines both borrowed extremely heavily and were in a lot of debt but Korea used that money to improve the technology and scale to a global level where the Philippines did not
    4. Malaysia pumped too much money into real estate and the stock market instead of directing it towards industry. They tried to skip a step in order to compete and out do Singapore but this eventually led to an economic collapse and stagnated technological progress 
    5. Capital allocation must be tied to industrial policy and export performance or else capital will be deployed in low return investments. Government must incentivize and cajole entrepreneurs towards manufacturing and international markets. The financier is not the economic savior some suggest but responds to the environment around him which the government helps create. Foreign funds must not be allowed in too early and deregulation can only happen once manufacturing is humming and technological progress is underway 
    6. Banking systems are so effective because they respond to central bank policy which is controlled by government policy. It is a simple and effective method, easier to to control than bond and stock markets
    7. There is no good understanding today of when a country should deregulate 
  4. China 
    1. China first tried the mass scale agriculture approach but soon realized it was ineffective so they transitioned to the gardening approach which greatly helped feed and put to work hundreds of millions. They also abandoned an approach where they would try to come up with everything internally and opened up trade to buy, borrow, and steal the best inventions and processes rather than trying to come up with everything internally
    2. Chinese government has always been paranoid of being at the mercy of necessary food stuff importers. They have taken away a lot of farmland dedicated to these grains in the past decade and may soon change the policy so they secure enough food to be continue to be independent 
    3. It is yet to be seen if China’s close control of oligopolies can help the economy long term. So far they have been able to strike a balance between control and allowing the entrepreneurs and employees to profit 
    4. China has a heavy bias to public and state owned enterprises rather than private companies. 
    5. People worry about shadow banking systems which lend to wealthy citizens outside the direct view of the government in order to seek higher returns but this has existed in one form or another in every developing country. Whenever government policy favors agriculture and industry over finance, shadow finances will pop up
    6. China’s financial policies are not as loose as many think if taken into context of Japan and Korea in similar stages, the size of their economy and the make up of their assets, and the fact that little money is owed externally. They are making great technological progress with the money they’ve borrowed but the best days of industrial-led policy development have passed so they will need to be more efficient moving forward. It is China’s size and not necessarily their innovative policies which have shaken the world. It does not yet have any world renowned firms and, if it is to take the next step developmentally, must improve its institutional policies 
  5. Other
  1. One of the key lessons when analyzing failed states is that they are isolated, closed off, and do not trade or interact with external countries. It has shown to be very hard, if not impossible to thrive if you are not open and trade with other countries 
  2. There is a weaker than expected correlation between education and rise in GDP. Most education occurs on the job and within firms rather than in school settings making industrial focus extremely important. If there is no industry to serve as a vehicle for learning, formal education may go to waste 
  3. Demographics, political pluralism / democracy are very important but is not touched on at length in this book 
  4. Rule of law is not one of the pillars for economic development but it is for overall development 
  5. Broadly, there are two types of economics. The first is akin to an education for developing countries in which the people require the skills needed to compete with their global peers. It requires nurture, protection, and competition. The second is more focused on efficiency and is applicable for more developed countries which needs less state intervention, more deregulation, freer markets and a larger focus on profits. The question is not if there are two but when they meet and how to best transition between the two. Where certain economically developed countries have fallen flat is that they fail to continue to evolve and develop. No policy is good forever and things must change. In addition, economic development is only one leg of the stool. Freedom, rule of law, environmental health, and individual autonomy are equally important and are needed for any country to prosper
  6. There is no significant economy who has evolved successfully out of policies of free trade and deregulation from the get go. They require proactive interventions – namely in agriculture and industry that foster early accumulation of capital and skill 

What I got out of it

  1. For developing countries, the best way to prosper is to first redistribute land so the people can use gardening style agriculture to feed themselves and save some money, then government’s must create subsidies and protective policies so that internal industry can grow and flourish with the goal of increasing skill and technological know-how so that future innovation can happen, then finance comes into the picture and must be used to further direct these two areas effectively and sustainably

Free to Choose: A Personal Statement by Milton Friedman

Summary

  1. An enlightening book which lays out compelling arguments that consumer’s personal freedoms have been chipped away due to government regulations and that the economic controls put in place are in fact hindering and stalling the American economy.

Key Takeaways

  1. Laissez faire, the invisible hand, and competition lead to more innovation and efficiency in every aspect of life whereas nationalization and state-run companies lead to bureaucracy and a slow down in innovation. Making the regulatory changes will be difficult to impossible to reverse but if the US wants to stay on top and keep moving forward, it is be necessary.
  2. Free trade (no tariffs) is in the consumer’s best interest
  3. America is an economic and political miracle arising out of two ideals – Adam Smith’s invisible hand and the Declaration of Independence
  4. Greatest threat to human freedom is concentration of power
  5. Even if can produce everything more efficiently than another country, it is not in our interest to produce everything. Should focus on what we do best
  6. Huge difference between equal opportunity and equal outcome. Not everybody will, or should, “finish the race at the same time”. Equality of outcome destroys freedom
  7. Competition is better for the consumer not because of businessmen’s altruism but because it is in their self interest

What I got out of it

  1. Some very powerful arguments which call for fewer government handouts and less economic restrictions. Undoubtedly many of these changes would be very difficult to implement due to governmental gridlock but they should be striven for. I think this book pairs well with Taleb’s Antifragile.

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