Archive for June, 2005

Hulk vs Superman

Monday, June 27th, 2005

There is a battle brewing between Google and eBay. Google looks stronger.

Adwords is a significant substitute for eBay. Small vendors can buy customer visits through micropayment advertising, as an alternative to paying eBay an auction fee for access to eBay visitors. Signals have been accumulating for some time:

  1. eBay discovered in January that it no longer has power to raise auction prices, because larger sellers are balking.
  2. eBay announced it is entering the private-label merchant site business, to slow down departures of its major sellers.
  3. Google announced Tuesday it is entering the payments business.
  4. It’s been true since Adwords inception that Google does not accept PayPal as a form of payment.
  5. Meg Whitman was caught angling for Eisner’s job at Disney a couple of months ago.

Taken together, one might infer that Google plans to eat eBay’s lunch, and eBay is scared. Will be interesting to see what happens.

I don’t mean to suggest eBay would cease to exist. Their auction business is still great, still a natural monopoly. However, a big chunk of eBay sales (a third? don’t know for sure) come from professional sellers that aren’t really auctioneers, but rather fixed-price vendors holding auctions to take advantage of eBay’s network. They would probably rather operate their own websites and run their own ads, if they can make just as much that way. Their presence on eBay has never made sense to me — private sites and Adwords are a simpler, better branded, more logical arrangement, if the scale and ROI are similar.

House flippers: here's what a bubble looks like

Tuesday, June 21st, 2005

See this post in its original implication at Income Profiles.

Offshoring strategy central to industrial policy

Monday, June 20th, 2005

U.S. industrial policy should aim to identify competitive dynamics and limits of offshoring, and feed this understanding back into the educational and research grant system.

Note I don’t say, “stop offshoring,” or “do more offshoring.” Offshoring is just a plaything of Adam Smith, like the electric motor. It happens, and you plan around it. All you can do is build a society that is competitive in the new circumstances.

For example, suppose — and this is just one possible direction — suppose that we’re on a trajectory in which 99% of software development ends up in well-educated developing countries. This might mitigate toward U.S. universities teaching abstract system design instead of implementation. It might imply creating new, extremely high leverage programming languages like Ruby. It might imply new modes of industrial organization such that a substantial part of the value chain is still captured here.

At minimum, the U.S. should be funding university research on this subject. While they still can. As the founder of India’s InfoSys told The World Is Flat author Thomas Friedman, “The global playing field has just been leveled, and you Americans are not ready.”

Rivals aren't enemies. Enemies aren't rivals.

Friday, June 17th, 2005

This “is China the enemy?” stuff in the press is silly. China is not an enemy but a rival for geopolitical leadership. That’s an important distinction.

Does that matter? Yes. There is a game theory aspect to geopolitical ranking, such that we do enjoy benefits of leadership. We already speak the language of global commerce; we issue debt denominated in our own currency, at favorable prices; and we have outsize geopolitical influence.

China’s victory in this rivalry is almost inevitable: because of the huge population, they need attain only the GDP per capita of Mexico to take the global #1 position in aggregate GDP.

So what is an American geopolitical strategist to do? How could China dominance be delayed or prevented (if that were even desirable, which is a different question). Well, you could try to cause China to be broken up, to slow down its growth, or to speed up your own growth.

The first two require interfering with the rival’s internal politics, which would almost certainly turn rival into enemy. It’s a really bad idea to make an enemy of your biggest rival, as Japan and Germany learned in the 1940s.

So the only viable alternative is to improve yourself: increase your own growth and/or population to retain the lead as long as possible.

For example, note that China’s population growth rate is slowing, while America’s isn’t. With clever management, the U.S. may be able to increase GDP per cap by 4% between now and 2050, at which point we’ll have 600 million people. If China by then has a mature growth rate and population of only 900 million and falling, then U.S. dominance might be extended by 100 years or more.

Benevolent government regulation?

Friday, June 17th, 2005

Lest we think all regulation is bad, look at unregulated Baja California.

Baja should be a tourist magnet: it has 2,000 miles of warm coastline, dry to subtropical weather, and rich and unusual flora, fauna and natural beauty. It is adjacent to California, one of the most prosperous places on the planet.

Yet outside of Tijuana and Cabo San Lucas, the whole peninsula sits impoverished and abandoned. Why? Too little regulation. Property rights are weak, so property doesn’t stay bought, leaving little incentive to develop. Government builds almost no infrastructure, so there’s little water (despite a huge, mostly untapped acquifer) or electricity. Bandits occasionally run amok for lack of adequate policing.

The environment is being trashed. Inside Baja’s national park, spraypaint graffiti covers boulders for mile after mile. Trash litters fields. Truckers perform roadside oil changes by simply draining engines directly onto the ground, leaving toxic black slicks at turnouts. Outside the national park, it’s worse.

Now imagine what would happen if the U.S. bought Baja, subdivided and resold it to developers, and used the proceeds to build infrastructure. A property gold rush, coincident with environmental cleanup. Why? Regulation — of property rights, civil order, environment, and much more.

Chew on this before you check “Libertarian” on your next voter registration card. A little bit of carefully designed, universally applied regulation is much better than none.

Indian call centers talking to each other

Thursday, June 16th, 2005

Say you are a doctor trying to collect payment from Blue Cross. You employ an offshore call center to do your collections. Your guy in India phones Blue Cross, which also employs offshore call centers to process payments. The call is patched back to India. Presto! Two call centers are yakking with each other on your nickel.

Picture two sari-clad women walking into a Bangalore office building each day, saying, “Morning Ralph. Morning Sam.” They sit with headsets in adjacent cubicles, arguing about American medical payments — with each other — for 8 hours. “Good night Ralph. Good night Sam.” Repeat for 40 years.

Adam Smith works in mysterious ways.

Prozac ate your net worth?

Thursday, June 16th, 2005

In the past 10 years, we have witnessed two of the four biggest asset bubbles in U.S. history: the Nasdaq in 1997-2000, and the mortgage bubble of 2005 (and counting). (5/3/07 update: a third mega-bubble is now taking shape in private equity.)

Irrational exuberance runs rampant, it seems. Why?

Interestingly, this historical anomaly has occurred at almost exactly the same time that SRI drugs (seratonin reuptake inhibitors, including Prozac, Paxil, etc.) rose to prominence, with millions of prescriptions written. Their express purpose: to make you exuberant, regardless of circumstances.

Not to say SRIs don’t serve a legitimate purpose. But somebody ought to run a regression analysis of Prozac prescriptions against Nasdaq — there’s a story there.

Incentives say more than words

Tuesday, June 14th, 2005

To see the truth, ignore what people say, and examine their incentives and actions. Here’s a great example.

Iran enriches uranium for, they say, “peaceful purposes.” Now, why would the world’s 4th largest oil producer need nuclear power? They can extract oil practically free, and generate electricity from oil at less than a tenth the cost of nuclear.

What, then, could be their only remaining incentive for developing nuclear energy? Of course they are building a bomb.

The U.S. habit of shouting and beating drums is much less effective than simply pointing out the comical misalignment here between statements and incentives.

Evolution and leadership

Monday, June 13th, 2005

Ever noticed how a few people manage to attain high station with few exceptional skills, other than a dogged refusal to admit mistakes? Psych studies have proven that most people value consistency more than accuracy in a leader. So maybe there’s an evolutionary explanation.

In The Selfish Gene, Richard Dawkins proposes evolutionarily stable states (ESS), in which subgroups within a species tend to have certain characteristics. These characteristics, he asserts, are adaptive as long as they do not occur in too large a proportion of the overall population. Whether such evolution occurs at a genetic or social level, it has implications for human behavior.

I assert an evolutionary environment (social or genetic) that produces the kind of leader you think you hate, but actually you love: the guy who never, ever admits weakness or error. Examples are everywhere, from Carly Fiorina to George W. Bush. But the best one is Saddam Hussein.

When Saddam emerged from an underground hole to find himself surrounded by hundreds of armed U.S. troops, what did he say? Not “Please don’t kill me.” Not “Could it be that I’ve gone too far?” No, his documented response was, “I am the president of Iraq. I am prepared to negotiate.”

This goes comedically far beyond overplaying one’s hand. Yet it’s not unusual among alpha males. I assert Saddam, like many autocrats both political and corporate, reached and attained his position by either having or developing a blindness to personal weakness. And others followed him because the brain has evolved to view self-assurance as a reasonable proxy for effectiveness.

It’s easy to see an evolutionary path that would end up here. We know that there exist evolved pseudo-reasoning heuristics in the human brain. This evolved pseudo-reasoning has been shown to explain why people tend to overvalue lottery tickets, for example. You can see how there might evolve a heuristic that equates a leader’s self-confidence with one’s own safety, thereby increasing offspring. You can see how this tendency might increase the more fearful a follower becomes.

But if this were to evolve, you can also see how a parasitical ESS could evolve: a subgroup that evolves no skill except blind self-confidence, which it uses to gain and retain a leadership role, thereby increasing offspring.

Worst of all, they're right

Sunday, June 12th, 2005

The power behind extreme fundamentalists, both Muslim & Christian, is that they’re right about moral decay. Though wrong about much else, they enjoy popular following by having correctly identified a problem.

You can define moral decay broadly as “Percentage of TV shows I won’t let my 5-year-old watch.” Currently about 90%, up from about 40% fifteen years ago, and 10% thirty years ago.

Most things you won’t let your toddler do are things you shouldn’t be doing yourself. Think about it.