China: No More Cheap Labor-CONSEQUENCES

I've been talking about this for the past two years, but I'm glad to see it gaining some traction.  Given the typical demand and supply curves, the most obvious way for companies to make profits is to lower the costs of production.  Right?  Simple economics.  There are two ways to do that: Technology and Cheap Labor.  Western democracies have done both, no need to explain that.

Politicians and pundits have used this fact on both sides of the aisle, often for conflicting purposes.  If its not the mexicans stealing jobs, it's the factory jobs getting outsourced to Asia, Bangladesh, India, etc. And everywhere the ray gun of capitalism is fired, populations are roughly enslaved--forced to work in deplorable conditions for a pittance.

At first, this doesn't seem so bad.  Factories often provide certain amenities (even the terrible ones) to its tenant-workers, room and board (taken from their already meager salaries,) minimal healthcare (cuts and scrapes).  In some countries where the local economies have been demolished through autocratic rule and farm-based economies are reduced to corporate serfdoms, this can often even lift up the population. Wage slavery, after all, requires enough sustenance to keep those brown and yellow hands a flutter with activity.

However, global capitalism (globalism) has for the past twenty years made a practice of finding the absolute perfect site for production of each part in the line.  A Dell computer, for example has its genesis in a spider web of nations, back and forth across the Atlantic Ocean several times.  How is this efficient production? I apologize for the shoddy map, my business textbooks had a much better one.  Every time the price of labor goes up in one country those lines change.  Of course, there are reasons NOT to change as well.  Overall stability is a big one.  No one will be building any factories in Afghanistan anytime soon (unless they're refining Opium).  Security in monetary systems are imperative as well.  If a dictator can seize your profits on a whim, then building a factory in North Korea may well be out too. (I was going to say Libyia, oh well).

Regardless, there comes a point, when the sheer amount of dollars (even when it disproportionately favors "the Haves" begins to lift up the local economy regardless of everyone's efforts.  Kennedy coined this phrase, though its been used repeatedly by the right recently: call it, "a rising tide lifts all ships."  It's not that things get better-because they get worse (see Apple factories), but reforms must be made. I've been wondering why that works out, and I think its because even when you funnel that supreme wealth into a tiny 1%, enough humane, reform minded people are able to be educated, and see how things work outside of the system, that they campaign for change. Usually the children of scientists, doctors, and lawyers, who are all trained in the humanistic doctrines of liberalism, because there would be no knowledge without equality and fraternity.

But I digress again, keep it together Ravingleftatic.

The point is--rising costs of production will change the game of globalism entirely.  Those changes will be endemic, and could be dangerous, causing market instability, currency fluctiatons and trade inequities.  Still, this is the time to do it.  No one will notice in a market that drops and raises 300 points a day.

But more on this later.

PlanetMoney: The Pelican Bill

So, Planetmoney did an interesting post on July 30th, about the environmental costs of the BP spill.  It's an interesting piece.  As we've discussed environmental costs are not included in GDP.  One of the reasons for this is because its difficult to effectively cost the effects on the environment.

In this case, they decided to price a pelican.  In point of fact, a much more valuable way to have done it was to tally up the price of shrimp in the Gulf of Mexico, but hey, I guess they wanted something that was more esoteric in value.

There first stop was to a bird lover, who paid up to $500 for a Pelican.  One of the hosts scoffed at this, saying that what a rare bird collector and preservationist would pay isn't the best estimate.  The second stop was Hollywood.  Hollywood, being in the business of accurately fabricating real life, rents pelicans.  That price was even higher, at $4,500 a day.

But here's where it gets interesting.  They talked to Gardner Brown, of the University of Washington, about his work valuing a wild duck.  This theory, called contingent valuation makes some interesting points:  1)  Nature is a public resource, ostensibly, we are ALL owners.  So while, we may not value a pelican particularly highly, maybe a few cents, in aggregate, the value of that pelican can be quite high.  Also, and this is the reason for this post, Brown, whose work was done for licensing and wildlife hunting issues, would go up to hunters and ask what price would they pay for one more duck.  One of the planetmoney hosts again scoffed at this, implying that hunters aren't necessarily experts, or that they wouldn't necessarily be honest.  He further stated that a survey isn't the same as a live market.  While these are good questions, I think a really obvious point would be that:

If my government were really interested in conservation, then they would pay hunters to stop hunting.  Recognizing that hunting is the source of their livelihood, the price of a duck is the hunters gross income.  It's not preferable, for obvious reasons, I mean, you'd have to be able to prove that this was your only source of income, and then what?  You would get paid to sit around all day?  This isn't a big problem in North America, but in the African bush, it's a very big problem.  In fact, AIDS was probably loosed on the world through a very similar transmission, people hunting and eating infected chimpanzees.  Bush meat is very popular in developing countries.  Not only is it cheaper than going to the market, there is also a blackmarket value for interesting animal parts.  Completely aside from the blackmarket value, is the superstitious value of eating gorilla balls for virility.

Art or Bonds?

Just a quick post here.  Planetmoney did a good little podcast on the economics of art selling.  As an art hobbyist, I found it intriguing because I do occasionally produce canvases, and I do occasionally have an opportunity to try and sell them.

The gist of the podcast is that the return on Bonds is always higher than the physical investment of a piece of art.  Well duh.  It turns out that one of the metrics of a how a painting is sold turns out to be popular swings in taste.  Though not surprising, this can have alarming effects on the price of your art investment.  A Van Gogh will always be worth millions, but if French Impressionism goes out of style, that could shave millions of dollars off your investment.  Whereas your investment in a bond is by its very nature a fixed investment.

There is one thing that they don't talk about in the podcast which surprised me.  Art is very fragile, and very space consuming.  One of the things we learn about in economics is that money, by it's very nature has to be fairly easy to store, and it has to be easily divisible and difficult to counterfeit.  There is a ton of risk in the art market that what you're buying is a fake, and moreover, if the housekeeper decides to dust the painting with dillouted ammonia, he'll destroy a 20m dollar investment in five minutes!  Your whole house could burn down and everything in it, and a bond will still retain its value, so long as the company, or government which backs it continues to exist.  It's funny too, because just the day before, "All Things Considered" ran its own podcast on the artmarket and they talked to an art seller whose client had had that very thing happen to him.  His housekeeper ruined his investment.

I am a nobody, and my art is only midling realism.  I paint mostly acyrylic and oil canvases between 8.5 x 11 and 30 x 40 inches.  In fact, a 30 x 40, canvas is the largest canvas I've ever worked on.  I may have the opportunity to sell some of my paintings fairly soon, so how would I price them?  And what am I likely to get for them?  So here, you have a piece that I have never shown before, that I am going to attempt to sell, it's an oil painting of a famous Japenese Garden in Florida.  It's 30 x 40 inches, and comes preframed, as in, I wanted to hang it myself and framed it to make it look nicer.  Cheap frame, but it looks good.  So how much, and what can I expect?  Well, the painting is only one of its kind.  Not easy to reproduce.  Even the cost of getting a lamine of the painting would be a good $100, though the price would then come down on each print thereafter.  Morevoer, getting it properly scanned at this point would require removing it from the stretchers which would damage the painting considerably.  Printing it based on a photograph?  Possible, but getting that well done would be fairly arduous as well, and lighting and veneer are critical issues.  What is this painting worth to me?  Well, two women in my life like it very much, and both would like to keep it.  But at least one wouldn't begrudge a little extra flow, and a little extra wall space.  Given that the painting took me three years to complete (long periods of no work done) my asking price is $2,000.  But, as with any work of art, I would expect to bargain on the price.  Is it worth 2,000?  Certainly, my name will never be worth anything, at least, not as a painter.  But sentimentally, the painting is definitely worth that much to me.  But I could piss $500 away in two weeks, and there I am, without one of the two oil paintings I've done.  Is that sentimentality worth a payment on my debt that would be negligable at best?  No.

Here's another one.  An oil 30x40 of the Rio Grande.  Also framed.  I have far fewer takers on this one, though as a painting I enjoy it more because of the feeling of space that the Rio Grande valley evokes.  Again, I'd ask for $2,000.  But neither of the two women in my life who wanted the first painting are particularly interested in this one.  Neither of them were cowboys for Halloween, I guess.  But I'd be more willing to part with this painting because it would make at least one of the women in my life very happy.  Particularly if I made a buck for it.  But here again, we come into some interesting economics about art.  I have a target audience for this, I know a guy who hails from this part of the world.  Would he be interested in a painting like this?  I have no idea, but if anyone would, it would be him.

Which leads me to the last topic for today.  Prices.  Prices are determined by the negotiations of buyers and sellers.  If there are no buyers for a particular asset, it's difficult to set a price.  This, we're told, is the reason why toxic assets had such variable values during the height of the crisis.  Or at least, that's what Planetmoney would have us believe.  But the avabilability of buyers and sellers is really only one aspect of price.  This is why so many long term investors, like those who buy and sell for pension funds, have such a negative feeling for shortsellers.  They aren't bothering to value an asset based on its actual worth or quality, but on speculation that the price will drop because of external market factors.  If the factors were internal, it would be a variant of insider trading.  If the perceived demand for my paintings is low, so is the value.  If the perceived quality of my paintings is low, so is the value.  But if the quality of my painting is perceived as really high, and demand is still low, then so must be, the price.