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Wednesday, April 29, 2009
Tuesday, April 07, 2009
Friday, April 03, 2009
Global Economic Crisis (Opinions Reviewed)
The opinions here were written by me on October 12, 2008, at the start of the global financial and economic crisis. It is interesting to review what I wrote and to see whether any of these ideas are still relevant. I also posted it on my barackobama page on 11/10/2009.
With the passage of nearly one month, this is a look back at my thoughts about solving the global financial crisis.
1. Secure and stabilize the mortgage payments by homeowners unable to pay. Federal government should force the mortgage lenders to write down the mortgage principal to reasonable value and offer current interest rate (i.e., take their loss for their stupidity to loan above reasonable values) and give a second mortgage to the homerowners with deferred payments. Idea is to enable these homeowners to hold on to their homes and continue to pay at their maximum ability. Eventually they will have to pay the government back. Restoring sustainable payments by these homeowners will stabilize the values of the "toxic" financial papers, instead of "mark to market" value of zero.
2. Federal government can inject capital into failing banks as equity investment and lower the reserve % on bank deposits for a 6 month emergency period, so that the banks can start lending more money with the same deposits. This is Soros' idea also.
3. Regulate and reform the rating agencies so that there is confidence in the market about the ratings of different financial papers from different issuers (Step in to nationalize them temporarily if necessary).
4. Develop a massive global database of all the toxic financial papers, tracing their relationships to all the companies and the subrpime mortage lenders and borrowers. This is provide transparency and certainty about the actual financial soundness of all companies involved with this financial crisis. With clarity, transparency and certainty, the sound and the unsound companies will be separated and ratings can be restored.
5. Change the mindset of all Americans, starting from the President, to act responsibly as a global citizen, and spend within the means. Raise taxes, cut spending, and be willing to work hard and settle for a lower standard of living.
Looking back at these issues, some progress has been made to stabilize home foreclosure and refinancing, but the problem is not yet solved. Huge unrestrained capital has been injected into the banks, so the credit problem is eased but the toxic papers are still there. Not much has been done with the rating and valuation of the toxic assets. The political pressure on the FASB to change from "Mark to Market" to "Mark to Model" for asset evaluation will not solve the problem but may add to the non-transparency of the toxic assets. Lastly Obama in trying to stimulate the economy has not yet acted responsibility to promote "living within the means".
It looks like there is a cushion to slow down the move towards the new lower equilibrium, but there is no attempt to steer it towards the long term equilibrium. Also, the attempt to use the energy and electric vehicle industries as the new boost to raise the long term equilibrium has not yet gotton off the ground, especially with the latter. China on the other hand, has caught on strong with its national priority on taking the global lead in electric vehicles.
With the passage of nearly one month, this is a look back at my thoughts about solving the global financial crisis.
1. Secure and stabilize the mortgage payments by homeowners unable to pay. Federal government should force the mortgage lenders to write down the mortgage principal to reasonable value and offer current interest rate (i.e., take their loss for their stupidity to loan above reasonable values) and give a second mortgage to the homerowners with deferred payments. Idea is to enable these homeowners to hold on to their homes and continue to pay at their maximum ability. Eventually they will have to pay the government back. Restoring sustainable payments by these homeowners will stabilize the values of the "toxic" financial papers, instead of "mark to market" value of zero.
2. Federal government can inject capital into failing banks as equity investment and lower the reserve % on bank deposits for a 6 month emergency period, so that the banks can start lending more money with the same deposits. This is Soros' idea also.
3. Regulate and reform the rating agencies so that there is confidence in the market about the ratings of different financial papers from different issuers (Step in to nationalize them temporarily if necessary).
4. Develop a massive global database of all the toxic financial papers, tracing their relationships to all the companies and the subrpime mortage lenders and borrowers. This is provide transparency and certainty about the actual financial soundness of all companies involved with this financial crisis. With clarity, transparency and certainty, the sound and the unsound companies will be separated and ratings can be restored.
5. Change the mindset of all Americans, starting from the President, to act responsibly as a global citizen, and spend within the means. Raise taxes, cut spending, and be willing to work hard and settle for a lower standard of living.
Looking back at these issues, some progress has been made to stabilize home foreclosure and refinancing, but the problem is not yet solved. Huge unrestrained capital has been injected into the banks, so the credit problem is eased but the toxic papers are still there. Not much has been done with the rating and valuation of the toxic assets. The political pressure on the FASB to change from "Mark to Market" to "Mark to Model" for asset evaluation will not solve the problem but may add to the non-transparency of the toxic assets. Lastly Obama in trying to stimulate the economy has not yet acted responsibility to promote "living within the means".
It looks like there is a cushion to slow down the move towards the new lower equilibrium, but there is no attempt to steer it towards the long term equilibrium. Also, the attempt to use the energy and electric vehicle industries as the new boost to raise the long term equilibrium has not yet gotton off the ground, especially with the latter. China on the other hand, has caught on strong with its national priority on taking the global lead in electric vehicles.
Wednesday, April 01, 2009
Holistic Power Supply and Delivery Chain – Foundations for a Smart Grid
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Friday, March 13, 2009
Good Answer?
Steven Pottle wrote: Good answer!!
--------------------
My Question:
What do you think of these ideas for funding the energy revolution in the midst of this financial crisis?
Your Answer:
During this global financial and economic crisis, which will last for at least a year or longer, oil prices will likely remain low. This would mean that hybrid cars, and future plug-in hybrid electric vehicles will not be competitive. Investments in large scale wind and solar projects will stop. Other new energy technologies such as coal gasification or liquefaction will also even less economical. How much taxpayer subsidy do we want to interfere with free market economics?
Mandatory national Renewable Portfolio Standard is central planning in disguise. Large scale wind power developments forced to be accepted into the nation's fragile transmission grid will likely increase the frequencies of blackouts. These will cause economic disruptions. There are solutions to the problem, but the risk of blackouts will still be higher.
The best idea is to modify the proposal to raise the gasoline tax. A carbon public benefit investment program should be instituted instead. This is not a carbon tax, but is similar. A rough calculation shows that your $1 per gallon add-on price is about $60 per ton of CO2 emission, which is very high. NordPool CO2 market price is around $15/ton. I have done some screening analysis which shows that at about $25-30 per ton, a CO2 charge will make wind or solar power plants firmed up with storage economicly highly competitive without tax subsidies. Nuclear and Integrated Gasification Combined Cycle plants would also be competitive.
If we translate $30/ton of CO2 into gasoline price, that is about $0.50 per gallon.
The automobile industry is highly dependent on the oil price, which has become very volatile. Long term investments prefer stable economic and financial forecasts. The government can intervene to provide a stable gasoline price to the consumers by adding a quickly adjusted variable CO2 public benefit charge, so that the consumer price, no matter what the oil company costs are, will be stable at about $3.50 per gallon. That seems to be the breakpoint when people start to feel the pain and want to switch to alternate fuel vehicles. At today's gasoline price around $2 per gallon, this means that the CO2 charge would be $1.50 per gallon now. But if the oil price goes back up to $120/bbl, the CO2 charge would be effectively reduced to zero.
Now, how do we make this CO2 charge work in the midst of this financial crisis? The amount of CO2 charge we pay at the pump, if charged through a credit card, can be traced to the account holder and credited to the consumer/investor. I look at this money as being held in a trust fund by the government in the name of the consumer. It may be treated as a savings account which can be withdrawn by the consumer under some conditions. It may eventually be available like another source of retirement income. So the consumers do not see it as a tax burden, but a savings that also is for the public and global good.
Car companies will see this as providing a forecastable and stable financial future for developing more efficient cars.
But actually, with today's oil and gasoline prices, the CO2 adder of $1.50 per gallon is about $90/ton of CO2. That is too high. If CO2 credit is traded between the electricity CO2 market and a car CO2 market, the disparity between the $15/ton in NordPool and the $90/ton to make the new car technologies viable would indicate that the world would be better off to reduce CO2 in power generation rather than in cars.
The same idea on how to treat a CO2 charge on the cost of electricity would apply, but instead of continously adjusting the CO2 price to maintain a stable electric price, the price schedule of the CO2 charge will be projected into the future with periodic adjustments. In this manner, long term investments in different power plants will have a more stable financial forecast.
Electricity consumers will similarly see the charge as their investments held as a public benefit fund.
--------------------
My Question:
What do you think of these ideas for funding the energy revolution in the midst of this financial crisis?
Your Answer:
During this global financial and economic crisis, which will last for at least a year or longer, oil prices will likely remain low. This would mean that hybrid cars, and future plug-in hybrid electric vehicles will not be competitive. Investments in large scale wind and solar projects will stop. Other new energy technologies such as coal gasification or liquefaction will also even less economical. How much taxpayer subsidy do we want to interfere with free market economics?
Mandatory national Renewable Portfolio Standard is central planning in disguise. Large scale wind power developments forced to be accepted into the nation's fragile transmission grid will likely increase the frequencies of blackouts. These will cause economic disruptions. There are solutions to the problem, but the risk of blackouts will still be higher.
The best idea is to modify the proposal to raise the gasoline tax. A carbon public benefit investment program should be instituted instead. This is not a carbon tax, but is similar. A rough calculation shows that your $1 per gallon add-on price is about $60 per ton of CO2 emission, which is very high. NordPool CO2 market price is around $15/ton. I have done some screening analysis which shows that at about $25-30 per ton, a CO2 charge will make wind or solar power plants firmed up with storage economicly highly competitive without tax subsidies. Nuclear and Integrated Gasification Combined Cycle plants would also be competitive.
If we translate $30/ton of CO2 into gasoline price, that is about $0.50 per gallon.
The automobile industry is highly dependent on the oil price, which has become very volatile. Long term investments prefer stable economic and financial forecasts. The government can intervene to provide a stable gasoline price to the consumers by adding a quickly adjusted variable CO2 public benefit charge, so that the consumer price, no matter what the oil company costs are, will be stable at about $3.50 per gallon. That seems to be the breakpoint when people start to feel the pain and want to switch to alternate fuel vehicles. At today's gasoline price around $2 per gallon, this means that the CO2 charge would be $1.50 per gallon now. But if the oil price goes back up to $120/bbl, the CO2 charge would be effectively reduced to zero.
Now, how do we make this CO2 charge work in the midst of this financial crisis? The amount of CO2 charge we pay at the pump, if charged through a credit card, can be traced to the account holder and credited to the consumer/investor. I look at this money as being held in a trust fund by the government in the name of the consumer. It may be treated as a savings account which can be withdrawn by the consumer under some conditions. It may eventually be available like another source of retirement income. So the consumers do not see it as a tax burden, but a savings that also is for the public and global good.
Car companies will see this as providing a forecastable and stable financial future for developing more efficient cars.
But actually, with today's oil and gasoline prices, the CO2 adder of $1.50 per gallon is about $90/ton of CO2. That is too high. If CO2 credit is traded between the electricity CO2 market and a car CO2 market, the disparity between the $15/ton in NordPool and the $90/ton to make the new car technologies viable would indicate that the world would be better off to reduce CO2 in power generation rather than in cars.
The same idea on how to treat a CO2 charge on the cost of electricity would apply, but instead of continously adjusting the CO2 price to maintain a stable electric price, the price schedule of the CO2 charge will be projected into the future with periodic adjustments. In this manner, long term investments in different power plants will have a more stable financial forecast.
Electricity consumers will similarly see the charge as their investments held as a public benefit fund.
Monday, December 22, 2008
Can a Wind Fall Profits Tax Work?
Can a wind fall profits tax (WFPT) work?
It can if there is a global system for its implementation. This is to manage and control gaming and tax evasion by shifting costs and profits between operations in different countries.
The purpose of a WFPT is to return the fruits of exploiting the Earth's natural resources to the Earth's inhabitants.
If we all agree to this Universal Principle, as people and as nations, then we can make this concept a reality. We can then solve the global poverty problem.
For each country, the revenue from the oil companies operating in that country will be reported to the tax authority of that country. Charged as costs against the revenue will be costs incurred within the country and costs incurred outside the country. Imported oil will be considered as costs incurred outside. For the tax authority, that import can be marked to the global market price. However, for oil obtained from inside the country, the actual costs of production will be charged. The total net income will be the total domestic revenue - domestic production cost - import cost marked to market.
Effective audit and international enforcement are needed to ensure that no cost shiftings take place.
A reasonable profit % should be allowed. An allowance for research and exploration is also appropriate. Beyond these, the excess revenue belongs to the Earth's inhabitants. Not just to the residents of that country.
In other words, the WPFT must be shared among the Earth's inhabitants. If this form of taxation is imposed on all oil companies in all countries, then the global WFPT will be a means for levelizing the world's monetary benefits from the world's oil resources.
It can if there is a global system for its implementation. This is to manage and control gaming and tax evasion by shifting costs and profits between operations in different countries.
The purpose of a WFPT is to return the fruits of exploiting the Earth's natural resources to the Earth's inhabitants.
If we all agree to this Universal Principle, as people and as nations, then we can make this concept a reality. We can then solve the global poverty problem.
For each country, the revenue from the oil companies operating in that country will be reported to the tax authority of that country. Charged as costs against the revenue will be costs incurred within the country and costs incurred outside the country. Imported oil will be considered as costs incurred outside. For the tax authority, that import can be marked to the global market price. However, for oil obtained from inside the country, the actual costs of production will be charged. The total net income will be the total domestic revenue - domestic production cost - import cost marked to market.
Effective audit and international enforcement are needed to ensure that no cost shiftings take place.
A reasonable profit % should be allowed. An allowance for research and exploration is also appropriate. Beyond these, the excess revenue belongs to the Earth's inhabitants. Not just to the residents of that country.
In other words, the WPFT must be shared among the Earth's inhabitants. If this form of taxation is imposed on all oil companies in all countries, then the global WFPT will be a means for levelizing the world's monetary benefits from the world's oil resources.
Friday, December 19, 2008
Gas Tax and Windfall Profits Tax
Today the price of oil drops to $33 per barrel. Gasoline prices in California are about $1.70 per gallon. These compare to the peak oil price of $146 per barrel and the peak gasoline price of about $4 per gallon.
China is considering a gasoline tax to keep the cost of gasoline at about the historically high level, and use the revenue from the gasoline tax to pay for highway tolls and maintenance.
In the US, gasoline tax is a fixed tax the cost of which is already included in the price of gasoline. To make the gasoline tax to have the effect of UDI-ism would require the gasoline tax to be much higher than what it is now in the US. It is a good idea to follow China and to impose a new gasoline public benefits charge (PBC) of about $2 per gallon. That will make the gasoline price at about $3.70 per gallon. At this price, consumers will be incentivized to save gasoline and switch to more efficient and smaller cars, etc. The $2 per gallon public benefits charge (PBC) should be credited directly to the name of the consumer. For example, if a consumer buys gasoline with his/her credit card, the $2 per gallon charge is credited to his/her public benefits account. People without credit cards can be credited with estimated gasoline purchases based on their vehicle mileage records, etc., in their annual tax filing forms. (There are other details which can be worked out to make it easy and verifiable.) The money in the public benefits account accrues in the account with interest until the account holder withdraws it for retirement or for emergency purposes. Therefore, even in today's recession/depression, the consumers can consider this charge as a mandatory saving for retirement, and not as taxes.
To be effective, this gasoline public benefit charge should be regulated quickly by the government to maintain a stable total gasoline price to consumers. For example, when the world oil price starts to go up due to market conditions, the government must reduce the gasoline public benefit charge accordingly so that the consumers do not face a big spike in the gasoline price.
To provide a stable investment environment for electric vehicles and smaller cars, it would be very helpful for the government to publish a target schedule for raising the gasoline PBC gradually over time, e.g., increasing from $2 per gallon to $3 per gallon over 5 years. Assuming that oil prices will go back to $140 per barrel after the recession is over, and may even continue to rise as world oil reserves continue to drop, gasoline prices without the PBC will go back up to $4 per gallon and higher. Therefore the total gasoline price will reach $7 per gallon, including $3 PBC.
Now the oil companies are naturally driven by their profit maximization goal. They may try to break the government’s will to keep the PBC charge high by driving the world spot market price of oil so high that the consumers will complain about the high PBC on top of the high gasoline cost due to world market price. Therefore, in order to maintain its ability to implement the gasoline PBC as a regulating variable to provide a stable investment environment for electric vehicles, the government should consider imposing a Windfall profits tax on the oil companies.
This piece is getting long, so I will continue on another day.
Wednesday, December 10, 2008
UDI-ism
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UDI-ism
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Sunday, February 05, 2006
How Greater Consumer and Worker Influences Can Improve Capitalism?
Consumers, ultimately the sole source of revenue to a corporation, should have a role to play in the decisions of a corporation. Why? Their money is what will sustain the business, pay the salaries of the workers and the executives, and provide the profits of the corporation, which in turn enable the corporation to make other decisions. As users of the products, they are affected by their quality, safety and functionalities. As sustainers of the production process, they are partially responsible for the social impacts whether they are directly affected or not. If all the customers withdraw their transactions with the corporation, the corporation cannot survive. Good management understands that the customers come first. If customers as a group exercise their influence, management has little choice but to listen.
Workers, the source of human capital to a corporation, should have a role to play in the decisions of the corporation. Why? They are essential to a corporation. If all the workers go on a strike, the corporation will be impaired if not disabled.
However, their power is weakened when outside labor sources are available, and management out-sources the labor. If the costs of the government’s unemployment program are internalized in the corporation’s decision, uneconomical out-sourcing decisions will not be made.
Greater diversity in the values of consumers and workers will moderate the sharply focused short-term profit interest of the corporation and make corporate decisions more in line with the long term interest of the corporation and with public good.
As a result, corporations will be more stable and less prone to boom and bust and Public good will also be improved.
Workers, the source of human capital to a corporation, should have a role to play in the decisions of the corporation. Why? They are essential to a corporation. If all the workers go on a strike, the corporation will be impaired if not disabled.
However, their power is weakened when outside labor sources are available, and management out-sources the labor. If the costs of the government’s unemployment program are internalized in the corporation’s decision, uneconomical out-sourcing decisions will not be made.
Greater diversity in the values of consumers and workers will moderate the sharply focused short-term profit interest of the corporation and make corporate decisions more in line with the long term interest of the corporation and with public good.
As a result, corporations will be more stable and less prone to boom and bust and Public good will also be improved.
Technology Needed to Provide Accounting of Public Benefits
If public good becomes quantifiable, accounting is needed before it is tradable. With today’s technology and low costs of computing and data communication, this technical requirement is not an impediment. Public Benefits Funds (PBF) could be set up at the global, national, state, local, and corporate levels to keep track of various public goods and the account balances owned or owed by all entities, citizens or corporate entities.
Participation in PBF is automatic by virtue of residency (or citizenship) and work status, etc. Actions taken by an individual or a corporation which have a public good impact will be credited or debited in the appropriate Public Benefits Funds.
Public good has categories (accounts) such as air quality, water quality, land quality, waste, wild life and vegetation quality, well-being of the poor and unprivileged, peace, education, and voluntary social services, etc.
Quantified measures will be used for each account, and a dollar value per measured quantity will be set periodically by some scientific, market or democratic process.
Consumer products will carry two prices, Tier 1 and Tier 2. Some will evolve into a single price. In addition to the monetary price currently adopted in Capitalism (Tier 1), there will be a Tier 2 price or credit equal to the consumption or creation of public good in producing or consuming the product. For example, an orange needed x gallons of water for its growth, removed y pounds of CO2, occupied z sq. ft. of land, and provided w sq. ft. of vegetation. When the orange is eaten, it will generate m oz. of waste. Altogether, the Tier 2 price can be computed by an approved formula using the current values of these public goods. A trial period will be used so that people can appreciate these Tier 2 prices and understand the true cost to society of all consumer products.
When a consumer product’s Tier 2 price is found to be reasonable and stable, it may be phased into a real price. The revenue from Tier 2 prices will be received by the corresponding Public Benefits Funds. Some funds will receive a credit and some a debit. For example, if water quality is worsened by a product, the water quality PBF will receive Tier 2 money from the sale of that product. If land quality is improved by a product, the land quality PBF will pay or credit the producer of that product for the improvement.
PBFs that accrue a positive fund balance will be able to take on projects to improve that public good. Members of that PBF may be allocated financial benefits, if democratically approved, to be taken one time or at a payout schedule, such as for retirement. For example, if people are willing to accept the existing level of air quality, the money collected from air polluters may be paid out to the people instead of using that money to make the air more clean than necessary.
PBFs that accrue a negative balance, e.g., from making payments to enterprises which have improved water quality, may charge a usage fee on other uses of that public good in order to make the PBF financially viable. For example, cleaner campgrounds may have to charge recreational users a higher fee. Moreover, there would be data to support a market value for such recreational fee.
National goals may be set up for automobile gas mileage or for air emissions per mile traveled. The owner of a car certified to perform better than the national goal will receive an air quality credit in his or her PBF account computed each year by the miles traveled on that car and its emission rates. Likewise, the owner of a car certified to have under-par gas mileage will receive an air quality debit in his or her PBF account. Depending on implementation, these debits and credits may be charged via the income tax process, or simply reconciled in the person’s total PBF account balance.
Volunteers for social work will receive PBF credits for performing accredited social work, such as voluntary work at the hospitals, prisons, and shelters or tutoring students, serving as voluntary business consultants for under-developed countries, etc.
Each person will receive a regular statement of his PBF accounts (or accessed through the Internet). A procedure for converting these credits into cash would be set up and could be used for retirement benefits. Because the PBF account is a tangible financial account, it is a powerful financial incentive for individuals to increase its value through social-conscious actions.
Participation in PBF is automatic by virtue of residency (or citizenship) and work status, etc. Actions taken by an individual or a corporation which have a public good impact will be credited or debited in the appropriate Public Benefits Funds.
Public good has categories (accounts) such as air quality, water quality, land quality, waste, wild life and vegetation quality, well-being of the poor and unprivileged, peace, education, and voluntary social services, etc.
Quantified measures will be used for each account, and a dollar value per measured quantity will be set periodically by some scientific, market or democratic process.
Consumer products will carry two prices, Tier 1 and Tier 2. Some will evolve into a single price. In addition to the monetary price currently adopted in Capitalism (Tier 1), there will be a Tier 2 price or credit equal to the consumption or creation of public good in producing or consuming the product. For example, an orange needed x gallons of water for its growth, removed y pounds of CO2, occupied z sq. ft. of land, and provided w sq. ft. of vegetation. When the orange is eaten, it will generate m oz. of waste. Altogether, the Tier 2 price can be computed by an approved formula using the current values of these public goods. A trial period will be used so that people can appreciate these Tier 2 prices and understand the true cost to society of all consumer products.
When a consumer product’s Tier 2 price is found to be reasonable and stable, it may be phased into a real price. The revenue from Tier 2 prices will be received by the corresponding Public Benefits Funds. Some funds will receive a credit and some a debit. For example, if water quality is worsened by a product, the water quality PBF will receive Tier 2 money from the sale of that product. If land quality is improved by a product, the land quality PBF will pay or credit the producer of that product for the improvement.
PBFs that accrue a positive fund balance will be able to take on projects to improve that public good. Members of that PBF may be allocated financial benefits, if democratically approved, to be taken one time or at a payout schedule, such as for retirement. For example, if people are willing to accept the existing level of air quality, the money collected from air polluters may be paid out to the people instead of using that money to make the air more clean than necessary.
PBFs that accrue a negative balance, e.g., from making payments to enterprises which have improved water quality, may charge a usage fee on other uses of that public good in order to make the PBF financially viable. For example, cleaner campgrounds may have to charge recreational users a higher fee. Moreover, there would be data to support a market value for such recreational fee.
National goals may be set up for automobile gas mileage or for air emissions per mile traveled. The owner of a car certified to perform better than the national goal will receive an air quality credit in his or her PBF account computed each year by the miles traveled on that car and its emission rates. Likewise, the owner of a car certified to have under-par gas mileage will receive an air quality debit in his or her PBF account. Depending on implementation, these debits and credits may be charged via the income tax process, or simply reconciled in the person’s total PBF account balance.
Volunteers for social work will receive PBF credits for performing accredited social work, such as voluntary work at the hospitals, prisons, and shelters or tutoring students, serving as voluntary business consultants for under-developed countries, etc.
Each person will receive a regular statement of his PBF accounts (or accessed through the Internet). A procedure for converting these credits into cash would be set up and could be used for retirement benefits. Because the PBF account is a tangible financial account, it is a powerful financial incentive for individuals to increase its value through social-conscious actions.
How Selfish Interest Can Promote Public Good?
If improving public good can increase a person’s tangible benefits, would that person not do it out of self-interest? The answer to this question is not a definitive yes. Making that tangible benefit a tradable monetary value will help induce the behavior. Once it is made tradable, even if that action results in a reduction in a personal benefit in another way, as long as the net effect is an increase of monetary value, the desired behavior may be induced. For example, if a person is given cash for each pound of garbage brought to a collection center, homeless people may find it to their self interest to make money from collecting garbage from the streets. On the other hand, an employed person earning a good wage would not be induced to do such work because it would take time away from the other paying job, unless of course, if garbage collection pays more.
In a corporate environment, if a corporate decision results in greater profits but reduces public good and there is a monetary penalty to the corporation due to that reduction of public good, the executive would likewise be induced to change the decision to maximize profit less the penalty. That decision would be to maximize the corporate self interest. In doing so, the corporation would also increase public good, if there is money to be made.
In a corporate environment, if a corporate decision results in greater profits but reduces public good and there is a monetary penalty to the corporation due to that reduction of public good, the executive would likewise be induced to change the decision to maximize profit less the penalty. That decision would be to maximize the corporate self interest. In doing so, the corporation would also increase public good, if there is money to be made.
Deficiencies of Capitalism and Central Planning
One of the deficiencies of a pure market system is the tendency towards a boom and bust cycle. Examples of that include the U.S. real-estate bubble in the 1980s which led to the collapse of the U.S. savings and loan associations, costing the American taxpayer more than $100 billion [2]. Another example is the telecommunication bubble which went from boom to bust in just nine years, from 1992 to 2001. Even the power market in California had experienced a cyclic phenomenon where the power shortage in the summer of 2000 led to a burst of power plant construction which subsequently slowed because of the ensuing drop in electricity prices [3]. Joseph Stiglitz, a Nobel economist, believes that his research on the consequences of imperfect and asymmetric information (where different individuals know different things) has shown that one of the reasons that the “invisible hand” economists associate with Adam Smith may be invisible is that it is simply not there.
In the book “20:21 Vision”, Bill Emmott, the Editor in Chief of The Economist, noted the failures of capitalistic markets to address environmental problems and their undesirable effects of increasing the income disparity between the rich and the poor within a country and between the rich nations and the poor nations [4].
In human history, two economic systems have been put to practice. Central planning (as implemented in Communism) and capitalistic market system engaged in a global competition during the twentieth century. Central planning proved to be stable but not conducive to innovation and economic efficiency. In comparison, the capitalistic market system has flourished. However, recent history has shown that there are deficiencies in the capitalistic market system. In the opinion of this author, some of these deficiencies are as follows:
· Self interest of corporate executives, unchecked sufficiently by investors and customers or their representative government leads to unbalanced management decisions.
· Financial incentives for corporate executives are mostly short term and measured by numbers some of which can be manipulated through creative accounting.
· There are insufficient management incentives to provide public good at the expense of corporate profits.
· Global corporations may have greater power than nation states.
· Globalization may override local interests of weak nation states.
· Consumers, even though they provide 100% of the revenue to corporations at the base of the business chains, have little power over the conduct of corporations.
· Workers, even though they provide the majority of the productive labor to corporations, have little power over corporate decisions, except where unions exist. (Corporations are not democracies.)
· There is a lack of global democratic institutions to balance the power of global corporations.
In the Central Planning economies, there were different problems and deficiencies, such as:
· Equal pay for different capabilities discourages high performance and provides little incentive for innovation.
· Central planning cannot adequately handle a complex economy.
· Power is concentrated on a ruling class with lack of diversity in ideas or views.
· It trails Capitalism in productivity and improvement of living standard.
· Reliance on information suppression to maintain political control leads to further economic inefficiencies.
· Comparison with Capitalism’s prosperity leads to political instability.
In reviewing these two lists of deficiencies, it can be observed that they are all about the creative power of diversity, the providing and balancing of incentives, and the balance of power among those actors with different incentives. If power is not balanced, people with differing incentives will behave in ways that produce results undesirable to others. If incentives are distorted or incomplete, even properly balanced power structure could result in undesirable consequences. It is postulated that when public goals are blended with self goals through UDI-ism, the hybrid system will provide the damping on the boom and bust tendency of the capitalistic market, as illustrated conceptually below.
In the book “20:21 Vision”, Bill Emmott, the Editor in Chief of The Economist, noted the failures of capitalistic markets to address environmental problems and their undesirable effects of increasing the income disparity between the rich and the poor within a country and between the rich nations and the poor nations [4].
In human history, two economic systems have been put to practice. Central planning (as implemented in Communism) and capitalistic market system engaged in a global competition during the twentieth century. Central planning proved to be stable but not conducive to innovation and economic efficiency. In comparison, the capitalistic market system has flourished. However, recent history has shown that there are deficiencies in the capitalistic market system. In the opinion of this author, some of these deficiencies are as follows:
· Self interest of corporate executives, unchecked sufficiently by investors and customers or their representative government leads to unbalanced management decisions.
· Financial incentives for corporate executives are mostly short term and measured by numbers some of which can be manipulated through creative accounting.
· There are insufficient management incentives to provide public good at the expense of corporate profits.
· Global corporations may have greater power than nation states.
· Globalization may override local interests of weak nation states.
· Consumers, even though they provide 100% of the revenue to corporations at the base of the business chains, have little power over the conduct of corporations.
· Workers, even though they provide the majority of the productive labor to corporations, have little power over corporate decisions, except where unions exist. (Corporations are not democracies.)
· There is a lack of global democratic institutions to balance the power of global corporations.
In the Central Planning economies, there were different problems and deficiencies, such as:
· Equal pay for different capabilities discourages high performance and provides little incentive for innovation.
· Central planning cannot adequately handle a complex economy.
· Power is concentrated on a ruling class with lack of diversity in ideas or views.
· It trails Capitalism in productivity and improvement of living standard.
· Reliance on information suppression to maintain political control leads to further economic inefficiencies.
· Comparison with Capitalism’s prosperity leads to political instability.
In reviewing these two lists of deficiencies, it can be observed that they are all about the creative power of diversity, the providing and balancing of incentives, and the balance of power among those actors with different incentives. If power is not balanced, people with differing incentives will behave in ways that produce results undesirable to others. If incentives are distorted or incomplete, even properly balanced power structure could result in undesirable consequences. It is postulated that when public goals are blended with self goals through UDI-ism, the hybrid system will provide the damping on the boom and bust tendency of the capitalistic market, as illustrated conceptually below.
How Incentives Affect Human Behavior?
As it is hard to philosophize without examples, we shall suggest some of these common and desirable conditions for the purpose of mental exercise or discussion:
· Having a clean environment
· Having good health
· Eliminating hunger and poverty
Most people would agree that these are desirable conditions for themselves to have. Most people would also agree that these are desirable conditions for others to have. Where people may disagree is the degree of help they would give to others in order for the others to enjoy these conditions, or the degree of sacrifice they are willing to make in order for others to enjoy these conditions.
Note that one can define a set of goals that all human beings desire, to various degrees of relative weighting factors, such that this set also includes all Public Good goals, although some people may give a near-zero weight to some of these Public Good goals. In other words, every human being has a set of goals that potentially affect his behavior. If these goals are quantifiable or at the minimum be comparable, a person’s behavior may be formulated as the multi-attribute objective function Z.
(1)
where Gi is a goal and wi is the weighting factor associated with the goal.
At the base of these human feelings about these goals is the self-preservation animal instinct. Why should I help others when they are my competitors for survival? Human beings became masters of the Earth by rising above the purely selfish behavior. Through thousands of years of evolution, human beings have come to realize that there is a net benefit to the group to share if individuals come together to work as a group. By hunting or farming together, more food is obtained or produced, and the risk of an individual starving is also reduced.
Note that this is a realization that the individual’s objective function Z is a summation over self-preserving goals as well as over public goals whereby the achieving of a public goal would provide tangible or perceived values to the individual. But each individual may have different weighting factors for the self-preserving goals and for the public goals, and therefore they would behave differently.
A modified formulation of the multi-attribute incentive model is as follows:
(2)
where Si is a Self goal, si is the weighting factor, Pj is a Public goal,pj is the weighting factor.
In this framework, one way to define the difference between Public goal and Self goal could be based on the number of individuals who would benefit from such a goal. For example, if only one person would benefit, it is clearly a Self goal to that individual only and clearly not considered a Public goal. If all individuals within a community’s boundary would benefit, it is clearly a Public goal. However, even in this situation, the space and time of the scope of the benefit may not cover all individuals at all time. It is therefore evident that it is not possible in some cases to draw a bright line between a Public goal and a Self goal by looking at the beneficiaries.
Another approach may be to define it based on the ownership of the matter (in the sense of atoms) which will be impacted by the achievement of the goal in question. For example, the air or the atmosphere is affected by the goal to achieve clean air. Who owns the atmosphere, the Public or an individual entity (person or a business entity)? Another example – take a goal of increasing oil production. Is it a Public goal or a Self goal? The affected matters include the land and vegetation above the oil wells, the atmosphere, the stability of the ground and the quality of the water adjacent to the oil wells. Who owns these impacted matters? The oil company may own or have the rights to certain portions of these matters, but not all of them. Unless the oil company takes on the full responsibility for neutralizing all impacts on those portions of matters it does not own, it would seem that oil production has both Self impact and Public impact.
This raises the question of how a goal should be defined. Increasing oil production is an activity, not a basic goal. Rather, it is a means to a more basic goal. Perhaps the more basic goal is to make profit for the oil company. That profit or the money is the matter that will be affected by the goal of profit making. Who owns that money? The company, i.e., the corporate entity. By drawing the line between the public and the business entity / individual, this makes the goal of profit making by that oil company a Self goal.
The debate will continue as to how one could define Public goal versus Self goal. However, it is not critical for moving forward on the concept. Ultimately, the weighting factors in Equations (1) or (2) to each decision maker are what matter to that decision. These weighting factors are mostly subjective, until it is possible to convert all attributes into a single denomination, which would be, for all practical purposes, the monetary value.
Coming back to the subject of human incentives, despite technological progress and the global economic boom through human history, the scarcity mentality persists. There may be tribal unity, but then one tribe would fight with another tribe over food or resources. Even today, this mentality persists between nations, between corporations, between ethnic and religious groups, and to a degree between individuals in the same community.
The multi-attribute incentive model of Equation (1) is not very effective in modifying the ingrained behavior of human beings. The reason is that self-directed and tangible benefits are real while public good does not translate into exclusive, self-directed and tangible benefits. You may have to enjoy it with others and it may not have immediate or direct effects because the effect can only be observed in the long term. Furthermore, creating that public good may require your sacrificing and reducing your direct benefits in other areas.
In keeping with the modified multi-attribute incentive model of Equation (2), visionary leaders try to develop social mechanisms to create more public good. Two paths were taken. The first is by law and order. The second is by religions.
Organizations (including governments) are set up by people or their leaders to unite people and to compete with other organizations. Rules and laws are set up to maintain order and to resolve conflicts. This system is a system of “sticks”, a system generally of punishment.
Religions are set up by visionaries to motivate people to do good things, either by appealing to people’s idealism or by setting up rules or commandments. It is a system of sticks and carrots. For example, if you commit a sin, you will go to Hell; if you do good acts, you will go to Heaven. But the carrots are usually not material gains in this world. By making promises for spiritual gains, from an economics perspective, religions are writing checks that can only be cashed or found to be void after death. But are these incentives effective in producing more Public Good, or greater Unity in Diversity? With the world’s continual violent conflicts and world poverty, etc., after several thousand years of recorded human history, it is hard to argue that such incentives are effective, or at least sufficient.
· Having a clean environment
· Having good health
· Eliminating hunger and poverty
Most people would agree that these are desirable conditions for themselves to have. Most people would also agree that these are desirable conditions for others to have. Where people may disagree is the degree of help they would give to others in order for the others to enjoy these conditions, or the degree of sacrifice they are willing to make in order for others to enjoy these conditions.
Note that one can define a set of goals that all human beings desire, to various degrees of relative weighting factors, such that this set also includes all Public Good goals, although some people may give a near-zero weight to some of these Public Good goals. In other words, every human being has a set of goals that potentially affect his behavior. If these goals are quantifiable or at the minimum be comparable, a person’s behavior may be formulated as the multi-attribute objective function Z.
(1)
where Gi is a goal and wi is the weighting factor associated with the goal.
At the base of these human feelings about these goals is the self-preservation animal instinct. Why should I help others when they are my competitors for survival? Human beings became masters of the Earth by rising above the purely selfish behavior. Through thousands of years of evolution, human beings have come to realize that there is a net benefit to the group to share if individuals come together to work as a group. By hunting or farming together, more food is obtained or produced, and the risk of an individual starving is also reduced.
Note that this is a realization that the individual’s objective function Z is a summation over self-preserving goals as well as over public goals whereby the achieving of a public goal would provide tangible or perceived values to the individual. But each individual may have different weighting factors for the self-preserving goals and for the public goals, and therefore they would behave differently.
A modified formulation of the multi-attribute incentive model is as follows:
(2)
where Si is a Self goal, si is the weighting factor, Pj is a Public goal,pj is the weighting factor.
In this framework, one way to define the difference between Public goal and Self goal could be based on the number of individuals who would benefit from such a goal. For example, if only one person would benefit, it is clearly a Self goal to that individual only and clearly not considered a Public goal. If all individuals within a community’s boundary would benefit, it is clearly a Public goal. However, even in this situation, the space and time of the scope of the benefit may not cover all individuals at all time. It is therefore evident that it is not possible in some cases to draw a bright line between a Public goal and a Self goal by looking at the beneficiaries.
Another approach may be to define it based on the ownership of the matter (in the sense of atoms) which will be impacted by the achievement of the goal in question. For example, the air or the atmosphere is affected by the goal to achieve clean air. Who owns the atmosphere, the Public or an individual entity (person or a business entity)? Another example – take a goal of increasing oil production. Is it a Public goal or a Self goal? The affected matters include the land and vegetation above the oil wells, the atmosphere, the stability of the ground and the quality of the water adjacent to the oil wells. Who owns these impacted matters? The oil company may own or have the rights to certain portions of these matters, but not all of them. Unless the oil company takes on the full responsibility for neutralizing all impacts on those portions of matters it does not own, it would seem that oil production has both Self impact and Public impact.
This raises the question of how a goal should be defined. Increasing oil production is an activity, not a basic goal. Rather, it is a means to a more basic goal. Perhaps the more basic goal is to make profit for the oil company. That profit or the money is the matter that will be affected by the goal of profit making. Who owns that money? The company, i.e., the corporate entity. By drawing the line between the public and the business entity / individual, this makes the goal of profit making by that oil company a Self goal.
The debate will continue as to how one could define Public goal versus Self goal. However, it is not critical for moving forward on the concept. Ultimately, the weighting factors in Equations (1) or (2) to each decision maker are what matter to that decision. These weighting factors are mostly subjective, until it is possible to convert all attributes into a single denomination, which would be, for all practical purposes, the monetary value.
Coming back to the subject of human incentives, despite technological progress and the global economic boom through human history, the scarcity mentality persists. There may be tribal unity, but then one tribe would fight with another tribe over food or resources. Even today, this mentality persists between nations, between corporations, between ethnic and religious groups, and to a degree between individuals in the same community.
The multi-attribute incentive model of Equation (1) is not very effective in modifying the ingrained behavior of human beings. The reason is that self-directed and tangible benefits are real while public good does not translate into exclusive, self-directed and tangible benefits. You may have to enjoy it with others and it may not have immediate or direct effects because the effect can only be observed in the long term. Furthermore, creating that public good may require your sacrificing and reducing your direct benefits in other areas.
In keeping with the modified multi-attribute incentive model of Equation (2), visionary leaders try to develop social mechanisms to create more public good. Two paths were taken. The first is by law and order. The second is by religions.
Organizations (including governments) are set up by people or their leaders to unite people and to compete with other organizations. Rules and laws are set up to maintain order and to resolve conflicts. This system is a system of “sticks”, a system generally of punishment.
Religions are set up by visionaries to motivate people to do good things, either by appealing to people’s idealism or by setting up rules or commandments. It is a system of sticks and carrots. For example, if you commit a sin, you will go to Hell; if you do good acts, you will go to Heaven. But the carrots are usually not material gains in this world. By making promises for spiritual gains, from an economics perspective, religions are writing checks that can only be cashed or found to be void after death. But are these incentives effective in producing more Public Good, or greater Unity in Diversity? With the world’s continual violent conflicts and world poverty, etc., after several thousand years of recorded human history, it is hard to argue that such incentives are effective, or at least sufficient.
CONCEPT OF UNITY IN DIVERSITY (UDI-ISM)
What is diversity? One fundamental world view of this concept is that each and every human being has a free will, and that all human beings allow others to exercise their free wills unless conflicts occur. When conflicts between individuals’ free wills occur, many problems arise. Diversity means the preservation of individual’s right of free-will choices. Unity in diversity is, by the choice of words, not the same as unity by conformity. Unity in Diversity means seeking unity while preserving diversity. Thus, unity is to be achieved not by force. More importantly, unity is not a static or absolute goal that is universally imposed on or accepted by everyone. It represents a common set of goals and their relative values freely emerging in consensus from the diverse goals and their relative values to the individuals. As individuals continue to change their relative values among their diverse goals, any consensus of unity, i.e., the subset of majority-subscribed common goals, will also change.
Religion and morality are not necessary elements for discussions about unity. If the majority chooses a single religion or a single set of black and white morality standards, they may try to make that the goal for unity. Whether they succeed or not depends on the amount of power or control they have over the community in which they live -- more specifically, over others in the community who do not subscribe to their view. The form of government becomes the key factor. In a properly balanced society, “tyranny by one, a few, or the majority” must be prevented to protect the minority. Given such a democratic society with protection for the minority, because of the free wills of the individuals, that unity will only be achieved when the minority’s free wills are persuaded to follow the majority’s goal.
In this world view then, critical thinking, reason and logic are also essential elements which enable the system to function. People are not forced to follow. People must be persuaded to change their minds. For minds to be changed with certain degree of permanence there must be a rational basis for the persuasion.
What is unity then? Unity is the striving for a common set of goals or desirable conditions that the entire population wants to have. We may call it the pursuit of Public Good.
Religion and morality are not necessary elements for discussions about unity. If the majority chooses a single religion or a single set of black and white morality standards, they may try to make that the goal for unity. Whether they succeed or not depends on the amount of power or control they have over the community in which they live -- more specifically, over others in the community who do not subscribe to their view. The form of government becomes the key factor. In a properly balanced society, “tyranny by one, a few, or the majority” must be prevented to protect the minority. Given such a democratic society with protection for the minority, because of the free wills of the individuals, that unity will only be achieved when the minority’s free wills are persuaded to follow the majority’s goal.
In this world view then, critical thinking, reason and logic are also essential elements which enable the system to function. People are not forced to follow. People must be persuaded to change their minds. For minds to be changed with certain degree of permanence there must be a rational basis for the persuasion.
What is unity then? Unity is the striving for a common set of goals or desirable conditions that the entire population wants to have. We may call it the pursuit of Public Good.
Did the Roman Catholic Church Pioneer UDI-ism?
However, in fact, one could argue that a market was available to use real money to obtain some of these other-worldly checks when medieval churches granted Indulgences to individuals in return for alms giving. The practice of Indulgences may be interpreted as an ingenious market mechanism to turn a spiritual asset into money. Under the Roman Catholic doctrine, sinners, after receiving forgiveness, are required to do temporal penance, such as saying a number of prayers over a number of days, or doing some public acts of penitence. This doctrine created a demand. The Church also claimed to have a treasury of spiritual good, through the doctrine of the Communion of Saints. This provided a supply. Indulgences may be granted by the Church to offset temporal penalties because of its abundant treasury of good work. This created an instrument for delivering the product from the supplier to the consumers. It is interesting to note that the Indulgences were denominated in a quantifiable number of days, equivalent to the days of temporal penances. Quantification enabled rational trading. Furthermore, this market achieved a useful economic function. The Church was the primary provider of social work and alms-giving was a mechanism for sustaining the public good. People can receive Indulgences by giving donation to the Church for various purposes. Thus, the trading of financial support for the good work done by the Church followed sound economic principles. Religion had in essence introduced an other-worldly system of incentives which at one time was tradable in the secular market. That practice was criticized by the Protestant movement and subsequently minimized. It is interesting to note that Indulgences are now denominated only as Plenary (full) or Partial with the latter value only known to God.
However, this “experiment” deserves consideration as we continue our exploration about UDI-ism because it was an attempt to connect between public good and self interests through a monetization of some previously unquantifiable attribute, and it applied the market concept.
-------------------------------------------------------
"An indulgence is a remission before God of the temporal punishment due to sins whose guilt has already been forgiven, which the faithful Christian who is duly disposed gains under certain defined conditions through the Church’s help when, as a minister of redemption, she dispenses and applies with authority the treasury of the satisfactions won by Christ and the saints" (Paul VI, Indulgentarium Doctrina 1).
However, this “experiment” deserves consideration as we continue our exploration about UDI-ism because it was an attempt to connect between public good and self interests through a monetization of some previously unquantifiable attribute, and it applied the market concept.
-------------------------------------------------------
"An indulgence is a remission before God of the temporal punishment due to sins whose guilt has already been forgiven, which the faithful Christian who is duly disposed gains under certain defined conditions through the Church’s help when, as a minister of redemption, she dispenses and applies with authority the treasury of the satisfactions won by Christ and the saints" (Paul VI, Indulgentarium Doctrina 1).
CAN TECHNOLOGY BRING ABOUT A BETTER ECONOMIC SYSTEM WHICH COMBINES MARKET PRINCIPLES WITH SOCIALISM?
The electric power industry went through a long and stable period of being a regulated industry, planned and operated by vertically-integrated utilities, before liberalization and restructuring became the global trend since the 1990s. In essence, it went from central planning towards a free market with mainly the generation supply side. After some major power market failures, debates about the solution are polarized around either reverting to the previous structure or more market liberalization on the rest of the supply-demand chain. The work presented here suggests a third way. It is based on an ideal which may be called “Unity in Diversity” or UDI-ism in short. The hypothesis is that if an individual’s selfish incentive can be made to align more with the socially optimal objective, then the creative energy of individuals’ diversity would become more unified in achieving the social objective. The key is to make that incentive market-based and monetary in nature. In order for the market-based monetization to take place, efficient market mechanisms with low transaction costs need to be developed. With technology and research, that may become possible. This paper will propose a third way of regulatory and financial structures and incentives which may fix this problem, seeking a balance between the traditional, regulated and vertical utility structure and the idealized power market designs which have viewed the transmission grid as a monopoly requiring regulation. This paper will first outline the concept of UDI-ism and discuss how it will benefit the economy in general. Second, it will then apply this concept to the problem of global warming and show how it will enable market principles to manage the effect of CO2 emitted by the electricity sector. Third, it will show how UDI-ism may provide public benefit solutions for the transmission investment problem, for example, for the inter-national transmission projects crossing multiple borders. Finally, the role of technology and research necessary to turn this ideal into reality will be discussed. It is hoped that this paper will stimulate discussions among researchers to further explore these ideas so that a more robust and more optimal economic system will become reality.
Saturday, February 05, 2005
Example of Applying UDI-ism to Rice Production
This example will show how having a Tier 2 price for water used in producing rice would result in a better supply of rice and less rice shortage in a periodic drought year.
The context is an island 11 miles long, with two rice farms at each end of the island. Producer A, located at the West end of the island, can produce rice at $10 per lb and uses 10 gallons of water for each lb of rice. Producer B, located at the East end of the island, has a drought-resistant strain of rice which costs $12.50 per lb to produce but uses only 2 gallons of water per lb of rice. Both producers have to pay a transportation cost of $1 per lb per mile to bring their rice to the inhabitants of the island who are scattered uniformly across the island between the two rice fields. For each mile across the island, the consumers have a normal demand for 2 lbs of rice. (Please ignore the ridiculously small amount of rice people on this island need to eat in order to survive, OK?)
The following table shows the cost of the rice from the two competitors across the island, the amount they each will sell, their revenues and the total cost of rice to the consumers. Obviously, we will assume that people will buy whichever producer’s rice is cheapest at their location. For example, at a distance of 6 miles from Producer A, which is also at a distance of 4 miles from Producer B, the price of A’s rice is ($10 for rice + $6 for transporation) or $16. The price of B’s rice is ($12.50 for rice + $4 for transportation) or $16.50. Here, at this location and further to the west, A’s rice will capture the entire market. The market changes winner when the distance is 7 miles from Producer A, which is also 3 miles from Producer B. At this location, A’s rice sells for $17 whereas B’s rice sells for $15.50. Therefore, B has the market at this location and also further east of here.
Table I – Market Shares of Producers A and B in a Normal Year
Note that in Table I, Producer A, having the cheaper strain of rice, has twice the market share as Producer B. The average cost of rice to the consumers is $13.83 per lb.
Next we will assume that on this island, a drought will take place once every five years. In the drought year, the total amount of water available for irrigating the rice fields is only 40 gallons, which is not enough to supply both fields. So the government rations that water between the two fields according to the ratio of their respective water usages in a normal year.
A produces 12 lbs of rice in a normal year and uses 120 gallons of water. B produces 6 lbs of rice in a normal year and uses 12 gallons of water. The rationing policy results in A receiving 40 gallons x 120/(120+12) = 36.4 gallons, and B receiving 40 gallons x 12/(120+12) = 3.6 gallons.
With these severely smaller amounts of water, A can only produce 3.64 lbs of rice and B can only produce 1.82 lbs of rice for a total rice production of 5.46 lbs. With a normal demand of 18 lbs of rice in the island, this results in a rice shortage of 12.54 lbs in the drought year.
For this example, we will also assume that both producers will recover their costs by raising the price of their rice. In other words, we assume that the total cost of the smaller amount of rice is the same as the cost of the normal year’s production of rice and that the full transportation cost of the normal year must also be paid. Thus, the average cost of rice in the drought year equals $45.65 per lb.
To put a dollar value on the rice shortage, we will assume that hunger has a monetary value of $500 per lb of rice shortage to the consumers. With a shortage of 12.54 lbs, the social cost of rice shortage equals $6,273.
In this market system, consumers take it as a matter of an act of God that droughts occur every five years, and that famine has to be tolerated even though the social cost is high.
Now, let us see if UDI-ism can change the conditions. We shall conduct experiments to charge the rice producers for their use of water at different Tier 2 prices for water, starting from $0.10 per gallon to $2 per gallon.
In a normal year, assuming that the cost of water is $1 per gallon, the cost of rice produced by A would be ($10 for rice + $10 for water) = $20 per lb of rice produced. In comparison, B’s rice would cost ($12.50 for rice + $2 for water) = $14.50 per lb of rice. Table II now shows the market share of the two producers in this UDI-ism system.
Table II - Market Shares of Producers A and B in a Normal Year
With Water Costing $1 per gallon
We clearly can observe that Producer B now has a competitive edge over Producer A and has captured a bigger share of the market, 14 lbs for B versus 4 lbs for A.
If we now look at what would happen in a drought year, we will find that because the average water use per lb of rice grown is lower now, there will be more rice produced and therefore less rice shortage.
By varying the Tier 2 price for water over the range of $0 to $2 per gallon, we find that the market shares for A and B in a normal water year vary according to the graph in Chart I.
Chart I
From Chart I, we can see that at a water cost between $0.30 and $0.40 per gallon, Producer B overtakes Producer A as the one with the larger market share. At a water cost of $1.40 per gallon, Producer A is wiped out of the market.
Chart II –Effect of Tier 2 Water Cost on Rice Shortage and Prices of Rice
Chart II shows the effect of various Tier 2 water prices on rice shortage in a drought year, and also on the average price of rice in both a normal year and a drought year. It can be seen that at a water cost of $1.40 per gallon, rice shortage disappears. Including a Tier 2 price for water at $1 per gallon raises the average price of rice from about $14 per lb to about $19 per lb in a normal year. On the other hand, the drought year price of rice would decrease from about $46 per lb to about $33 per lb if UDI-ism is applied at a Tier 2 water price of $1 per gallon.
If we remember that Tier 2 prices are actually money collected from consumers into a Public Benefit Fund (PBF) managed by the government, that money is held for the benefit of the citizens. It is not a valueless burden on the consumers. In fact, by paying into this PBF, the money has caused a reduction in rice shortage and a reduction in water consumption. This economic benefit is shown in Chart III.
This has come about because UDI-ism created a more optimal market environment which enables a more efficient production process to compete with another process which is less efficient when all resources are considered. Water was previously treated in this example as a free resource, i.e., an externality. In reality, water is not free. It has a direct economic value, even though it may be difficult to quantify. One may argue that the value of water in this island is $1.40 per gallon, because at this price, it results in the greatest economic benefit to the economy.
Chart III – Economic Benefits of UDI-ism Over Each Five-Year Drought Cycle
In Chart III, the total cost of the rice consumed in each five-year drought cycle is shown for various Tier 2 prices of water, without and with the cost of water included. Because the cost of the water is included in the cost of rice, the total cost of rice consumed in five years increases with the Tier 2 price of water. However, the shortage cost, i.e., the social cost of famine, is greatly decreased by applying UDI-ism. At the Tier 2 water price of $1.40 per gallon, the shortage cost becomes zero. If we look at the total cost to society, which is the total cost of rice (including water cost) and the shortage cost, the optimum or the lowest cost is at the Tier 2 water price of $1.40 per gallon. When the Tier 2 water price goes above $1.40, no economic saving is produced but the higher cost of water simply raises the total cost of the rice.
If one looks at the relatively small part the Tier 2 water cost is in the total cost over the five years, and the fact that it is a revenue held for the benefit of the citizens, the benefits of applying UDI-ism are tremendous. It has eliminated the famine due to drought and it has created a PBF which can be used for creating other public benefits.
The context is an island 11 miles long, with two rice farms at each end of the island. Producer A, located at the West end of the island, can produce rice at $10 per lb and uses 10 gallons of water for each lb of rice. Producer B, located at the East end of the island, has a drought-resistant strain of rice which costs $12.50 per lb to produce but uses only 2 gallons of water per lb of rice. Both producers have to pay a transportation cost of $1 per lb per mile to bring their rice to the inhabitants of the island who are scattered uniformly across the island between the two rice fields. For each mile across the island, the consumers have a normal demand for 2 lbs of rice. (Please ignore the ridiculously small amount of rice people on this island need to eat in order to survive, OK?)
The following table shows the cost of the rice from the two competitors across the island, the amount they each will sell, their revenues and the total cost of rice to the consumers. Obviously, we will assume that people will buy whichever producer’s rice is cheapest at their location. For example, at a distance of 6 miles from Producer A, which is also at a distance of 4 miles from Producer B, the price of A’s rice is ($10 for rice + $6 for transporation) or $16. The price of B’s rice is ($12.50 for rice + $4 for transportation) or $16.50. Here, at this location and further to the west, A’s rice will capture the entire market. The market changes winner when the distance is 7 miles from Producer A, which is also 3 miles from Producer B. At this location, A’s rice sells for $17 whereas B’s rice sells for $15.50. Therefore, B has the market at this location and also further east of here.
Table I – Market Shares of Producers A and B in a Normal Year
Note that in Table I, Producer A, having the cheaper strain of rice, has twice the market share as Producer B. The average cost of rice to the consumers is $13.83 per lb.
Next we will assume that on this island, a drought will take place once every five years. In the drought year, the total amount of water available for irrigating the rice fields is only 40 gallons, which is not enough to supply both fields. So the government rations that water between the two fields according to the ratio of their respective water usages in a normal year.
A produces 12 lbs of rice in a normal year and uses 120 gallons of water. B produces 6 lbs of rice in a normal year and uses 12 gallons of water. The rationing policy results in A receiving 40 gallons x 120/(120+12) = 36.4 gallons, and B receiving 40 gallons x 12/(120+12) = 3.6 gallons.
With these severely smaller amounts of water, A can only produce 3.64 lbs of rice and B can only produce 1.82 lbs of rice for a total rice production of 5.46 lbs. With a normal demand of 18 lbs of rice in the island, this results in a rice shortage of 12.54 lbs in the drought year.
For this example, we will also assume that both producers will recover their costs by raising the price of their rice. In other words, we assume that the total cost of the smaller amount of rice is the same as the cost of the normal year’s production of rice and that the full transportation cost of the normal year must also be paid. Thus, the average cost of rice in the drought year equals $45.65 per lb.
To put a dollar value on the rice shortage, we will assume that hunger has a monetary value of $500 per lb of rice shortage to the consumers. With a shortage of 12.54 lbs, the social cost of rice shortage equals $6,273.
In this market system, consumers take it as a matter of an act of God that droughts occur every five years, and that famine has to be tolerated even though the social cost is high.
Now, let us see if UDI-ism can change the conditions. We shall conduct experiments to charge the rice producers for their use of water at different Tier 2 prices for water, starting from $0.10 per gallon to $2 per gallon.
In a normal year, assuming that the cost of water is $1 per gallon, the cost of rice produced by A would be ($10 for rice + $10 for water) = $20 per lb of rice produced. In comparison, B’s rice would cost ($12.50 for rice + $2 for water) = $14.50 per lb of rice. Table II now shows the market share of the two producers in this UDI-ism system.
Table II - Market Shares of Producers A and B in a Normal Year
With Water Costing $1 per gallon
We clearly can observe that Producer B now has a competitive edge over Producer A and has captured a bigger share of the market, 14 lbs for B versus 4 lbs for A.
If we now look at what would happen in a drought year, we will find that because the average water use per lb of rice grown is lower now, there will be more rice produced and therefore less rice shortage.
By varying the Tier 2 price for water over the range of $0 to $2 per gallon, we find that the market shares for A and B in a normal water year vary according to the graph in Chart I.
Chart I
From Chart I, we can see that at a water cost between $0.30 and $0.40 per gallon, Producer B overtakes Producer A as the one with the larger market share. At a water cost of $1.40 per gallon, Producer A is wiped out of the market.
Chart II –Effect of Tier 2 Water Cost on Rice Shortage and Prices of Rice
Chart II shows the effect of various Tier 2 water prices on rice shortage in a drought year, and also on the average price of rice in both a normal year and a drought year. It can be seen that at a water cost of $1.40 per gallon, rice shortage disappears. Including a Tier 2 price for water at $1 per gallon raises the average price of rice from about $14 per lb to about $19 per lb in a normal year. On the other hand, the drought year price of rice would decrease from about $46 per lb to about $33 per lb if UDI-ism is applied at a Tier 2 water price of $1 per gallon.
If we remember that Tier 2 prices are actually money collected from consumers into a Public Benefit Fund (PBF) managed by the government, that money is held for the benefit of the citizens. It is not a valueless burden on the consumers. In fact, by paying into this PBF, the money has caused a reduction in rice shortage and a reduction in water consumption. This economic benefit is shown in Chart III.
This has come about because UDI-ism created a more optimal market environment which enables a more efficient production process to compete with another process which is less efficient when all resources are considered. Water was previously treated in this example as a free resource, i.e., an externality. In reality, water is not free. It has a direct economic value, even though it may be difficult to quantify. One may argue that the value of water in this island is $1.40 per gallon, because at this price, it results in the greatest economic benefit to the economy.
Chart III – Economic Benefits of UDI-ism Over Each Five-Year Drought Cycle
In Chart III, the total cost of the rice consumed in each five-year drought cycle is shown for various Tier 2 prices of water, without and with the cost of water included. Because the cost of the water is included in the cost of rice, the total cost of rice consumed in five years increases with the Tier 2 price of water. However, the shortage cost, i.e., the social cost of famine, is greatly decreased by applying UDI-ism. At the Tier 2 water price of $1.40 per gallon, the shortage cost becomes zero. If we look at the total cost to society, which is the total cost of rice (including water cost) and the shortage cost, the optimum or the lowest cost is at the Tier 2 water price of $1.40 per gallon. When the Tier 2 water price goes above $1.40, no economic saving is produced but the higher cost of water simply raises the total cost of the rice.
If one looks at the relatively small part the Tier 2 water cost is in the total cost over the five years, and the fact that it is a revenue held for the benefit of the citizens, the benefits of applying UDI-ism are tremendous. It has eliminated the famine due to drought and it has created a PBF which can be used for creating other public benefits.
Thursday, January 20, 2005
UD-ism – A Concept of Achieving Unity in Diversity Through a Practical Transformation of Capitalism and Democracy
What is diversity? One fundamental world view of this value system is that each and every human being has the right to a free will, and that other human beings allow others to exercise their free wills unless conflicts occur. When conflicts between individuals’ free wills occur, that is where many social problems take place. Diversity means the preservation of individual’s right of free will choices. Unity in diversity is, by the choice of words, not the same as unity by conformity. Unity in diversity means seeking unity while preserving diversity. In Chinese this translates to 
. Thus, unity is to be achieved not by dictatorship. More importantly, unity is not a static or absolute goal that is universally accepted by everyone. It represents a common set of goals or values freely emerging as a majority consensus from the diverse goals and values of the individuals. As individuals continue to change their values, that consensus of unity will also change.
Religion and morality has intrinsically nothing to do with it. However, if the majority chooses a single religion or a single set of black and white morality standards, they will try to set that goal for unity. However, because of the free wills of the individuals, that unity will only be achieved when the minority free wills are persuaded to follow the majority.
In this world view then, critical thinking, reason and logic are also essential elements which enable the system to function. People are not forced to follow. People must be persuaded through reasons to change their minds.
What is the unity then? Unity is a common set of desirable conditions that the majority wants to have. We shall call them Public Good. As it is hard to philosophize without specifics, we shall suggest some of these desirable conditions for the purpose of discussion:
- Having clean and natural environment
- Having good health
- Eliminating hunger and poverty
Most people would agree that these are desirable conditions for themselves to have. Most people would also agree that these are desirable conditions for others to have. Where people may disagree is the degree of help they would give to others in order for the others to enjoy these conditions.
At the base of these feelings is the self-preservation animal instinct. Why should I help the others? They are my competitors for survival. Through evolution, human beings have come to realize that there is a net benefit to the group to share if individuals come together to work as a group. By hunting or farming together, more food is obtained or produced, and the risk of an individual starving is also reduced. However, the scarcity mentality persists. There may be tribal unity, but then one tribe would fight with another tribe over food or resources. Even today, this mentality persists between nations, between corporations, between ethnic and religious groups, and to a degree between individuals.
Organizations (including governments) are set up by people or their leaders to unite people and to compete with other organizations. Rules and laws are set up to maintain order and to resolve conflicts. This system is a system of “sticks”, a system generally of punishment.
Religions are set up by visionaries to motivate people to do good things, either by appealing to people’s idealism or by setting up rules or commandments. It is a system of sticks and carrots. If you commit a sin, you will go to Hell. If you do good, you will go to Heaven. But the carrots are not material gains in this world. So the carrots are not very powerful incentives.
Now the shocker to some idealists. UDI-ism is not a high-minded holier-than-thou system of philosophy. UDI-ism is a system of carrots more so than of sticks. The carrots of UDI-ism ultimately is either money or material gains in this world. UDI-ism is not a religion. It is not a moral code of behavior. It is simply an incentive system for people to profit for themselves while doing things that also produces Public Good. By doing things that are good for all, individuals will receive selfish gains. How? That is the challenge.
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