Urban Economics and City Management #4 COVID and social mobility in cities
I keep developing on a few topics in parallel, with a special focus on two of them. Lessons in economics and management which I can derive for my students, out of my personal experience as a small investor in the stock market, for one, and a broader, scientific work on the civilizational role of cities and our human collective intelligence, for two.
I like starting with the observation of real life, and I like ending with it as well. What I see around gives me the initial incentive to do research and makes the last pitch for testing my findings and intuitions. In my personal experience as investor, I have simply confirmed an initial intuition that giving a written, consistent and public account thereof helps me nailing down efficient strategies as an investor. As regards cities and collective intelligence, the first part of that topic comes from observing changes in urban life since COVID-19 broke out, and the second part is just a generalized, though mild an intellectual obsession, which I started developing once I observed the way artificial neural networks work.
In this update, I want to develop on two specific points, connected to those two paths of research and writing. As far as my investment is concerned, I am seriously entertaining the idea of broadening my investment portfolio in the sector of renewable energies, more specifically in the photovoltaic. I can notice a rush on the solar business in the U.S. I am thinking about investing in some of those shares. I already have, and have made a nice profit on the stock of First Solar (https://investor.firstsolar.com/home/default.aspx ) as well as on that of SMA Solar (https://www.sma.de/en/investor-relations/overview.html ). Currently, I am observing three other companies: Vivint Solar (https://investors.vivintsolar.com/company/investors/investors-overview/default.aspx ), Canadian Solar (http://investors.canadiansolar.com/investor-relations ), and SolarEdge Technologies (https://investors.solaredge.com/investor-overview ). Below, I am placing the graphs of stock price over the last year, as regards those solar businesses. There is something like a common trend in those stock prices. March and April 2020 were a moment of brief jump upwards, which subsequently turned into a shy lie-down, and since the beginning of August 2020 another journey into the realm of investors’ keen interest seems to be on the way.
Before you have a look at the graphs, here is a summary table with selected financials, approached as relative gradients of change, or d(x).
|Change from 01/01/2020 to 31/08/2020|
|Company||d(market cap)||d(assets)||d(operational cash-flow)|
|First Solar||+23,9%||-6%||Deeper negative: – $80 million|
|SMA Solar||+27,5%||-10%||Deeper negative: -€40 million|
|Vivint Solar||+362%||+11%||Deeper negative: – $9 million|
|SolarEdge||+98%||0||+ $50 million|
|Canadian Solar||+41%||+4%||+ $90 million|
There are two fundamental traits of business models which I am having a close look at. Firstly, it is the correlation between changes in market capitalization, and changes in assets. I am checking if the solar businesses I want to invest in have their capital base functionally connected to the financial market. Looks a bit wobbly, as for now. Secondly, I look at current operational efficiency, measured with operational cash flow. Here, I can see there is still a lot to do. Here is the link to You Tube video with all that topic developed: Business models in renewable energies #3 Solar business and investment opportunities [Renew BM 3 2020-09-06 09-20-30 ; https://youtu.be/wYkW5KHQlDg ].
Those business models seem to be in a phase of slow stabilization. The industry as a whole seems to be slowly figuring out the right way of running that PV show, however the truly efficient scheme is still to be nailed down. Investment in those companies is based on reasonable trust in the growth of their market, and in the positive impact of technological innovation. Question: is it a good move to invest now? Answer: it is risky, but acceptably rational; once those business models become really efficient, the industry will be in or close to the phase of maturity, which, in turn, does not really allow expecting abnormally high return on investment.
This is a very ‘financial’, hands-off approach to business models. In this case, business models of those photovoltaic businesses matter to me just to the extent of being fundamentally predictable. I don’t want to run a solar business, I just want to have elementary understanding of what’s going on, business-wise, to make my investment better grounded. Looking from inside a business, such an approach is informative about the way that a business model should ‘speak’ to investors.
At the end of the day, I think I am most likely to invest in SolarEdge. It seems to have all the LEGO blocks in place for a good opening. Good cash flow, although a bit sluggish when it comes to real investment.
As regards COVID-19 and cities, I am formulating the following hypothesis: COVID-19 has awakened some deeply rooted cultural patterns, which date back to the times of high epidemic risk, long before vaccines, sanitation and widespread basic healthcare. Those patterns involve less spatial mobility in the population, and social interactions within relatively steady social circles of knowingly healthy people. As a result, the overall frequency of social interactions in cities is likely to decrease, and, as a contingent result, the formation of new social roles is likely to slow down. Then, either digital technologies take over the function of direct social interactions and new social roles will be shaping themselves via your average smartphone, with all the apps it is blessed (haunted?) with, or the formation of new social roles will slow down in general. In that last case, we could have hard times with keeping up our pace of technological change. Here is the link to You Tube video which summarizes what is written below: Urban Economics and City Management #4 COVID and social mobility in cities [ Cities 4 2020-09-06 09-43-06 ; https://youtu.be/m3FZvsscw7A ].
I want to gain some insight into the epidemiological angle of that claim, and I am passing in review some recent literature. I start with: Gatto, M., Bertuzzo, E., Mari, L., Miccoli, S., Carraro, L., Casagrandi, R., & Rinaldo, A. (2020). Spread and dynamics of the COVID-19 epidemic in Italy: Effects of emergency containment measures. Proceedings of the National Academy of Sciences, 117(19), 10484-10491 (https://www.pnas.org/content/pnas/117/19/10484.full.pdf ). As it is usually the case, my internal curious ape starts paying attention to details which could come as secondary for other people, and my internal happy bulldog follows along and bites deep into those details. The little detail in this specific paper is a parameter: the number of people quarantined as a percentage of those positively diagnosed with Sars-Cov-2. In the model developed by Gatto et al., that parameter is kept constant at 40%, which is, apparently, the average level empirically observed in Italy during the Spring 2020 outbreak. Quarantine is strict isolation between carriers and (supposedly) non-carriers of the virus. Quarantine can be placed on the same scale as basic social distancing. It is just stricter, and, in quantitative terms, it drives much lower the likelihood of infectious social interaction. Gatto el al. insist that testing effort and quarantining are essential components of collective defence against the epidemic. I generalize: testing and quarantine are patterns of collective behaviour. I check whether people around me are carriers or not, and then I split them into two categories: those whom I strongly suspect to host and transmit Sars-Cov-2, and all the rest. I define two patterns of social interaction with those two groups: very restrictive with the former, and cautiously bon vivant with the others (still, no hugging). As the technologies of testing will be inevitably diffusing across the social landscape, that structured pattern is likely to spread as well.
Now, I pay a short intellectual visit to Jiang, P., Fu, X., Van Fan, Y., Klemeš, J. J., Chen, P., Ma, S., & Zhang, W. (2020). Spatial-temporal potential exposure risk analytics and urban sustainability impacts related to COVID-19 mitigation: A perspective from car mobility behaviour. Journal of Cleaner Production, 123673 https://doi.org/10.1016/j.jclepro.2020.123673 . Their methodology is based on correlating spatial mobility of cars in residential areas of Singapore with the risk of infection with COVID-19. A 44,3% ÷ 55,4% decrease in the spatial mobility of cars is correlated with a 72% decrease in the risk of social transmission of the virus. I intuitively translate it into geometrical patterns. Lower mobility in cars means a shorter average radius of travel by the means of available urban transportation. In the presence of epidemic risk, people move across a smaller average territory.
In another paper (or rather in a commented dataset), namely in Pepe, E., Bajardi, P., Gauvin, L., Privitera, F., Lake, B., Cattuto, C., & Tizzoni, M. (2020). COVID-19 outbreak response, a dataset to assess mobility changes in Italy following national lockdown. Scientific data, 7(1), 1-7. https://www.nature.com/articles/s41597-020-00575-2.pdf?origin=ppub , I find an enlarged catalogue of metrics pertinent to spatial mobility. That paper, in turn, lead me to the functionality run by Google: https://www.google.com/covid19/mobility/ . I went through all of it a bit cursorily, and I noticed two things. First of all, countries are strongly idiosyncratic in their social response to the pandemic. Still, and second of all, there are common denominators across idiosyncrasies and the most visible one is cyclicality. Each society seems to have been experimenting with the spatial mobility they can afford and sustain in the presence of epidemic risk. There is a cycle experimentation, around 3 – 4 weeks. Experimentation means learning and learning usually leads to durable behavioural change. In other words, we (I mean, homo sapiens) are currently learning, with the pandemic, new ways of being together, and those ways are likely to incrust themselves into our social structures.
The article by Kraemer, M. U., Yang, C. H., Gutierrez, B., Wu, C. H., Klein, B., Pigott, D. M., … & Brownstein, J. S. (2020). The effect of human mobility and control measures on the COVID-19 epidemic in China. Science, 368(6490), 493-497 (https://science.sciencemag.org/content/368/6490/493 ) shows that without any restrictions in place, the spatial distribution of COVID-19 cases is strongly correlated with spatial mobility of people. With restrictions in place, that correlation can be curbed, however it is impossible to drive down to zero. In plain human, it means that even as stringent lockdowns as we could see in China cannot reduce spatial mobility to a level which would completely prevent the spread of the virus.
By the way, in Gao, S., Rao, J., Kang, Y., Liang, Y., & Kruse, J. (2020). Mapping county-level mobility pattern changes in the United States in response to COVID-19. SIGSPATIAL Special, 12(1), 16-26 (https://arxiv.org/pdf/2004.04544.pdf ), I read that the whole idea of tracking spatial mobility with people’s personal smartphones largely backfired because the GDS transponders, installed in the average phone, have around 20 metres of horizontal error, on average, and are easily blurred when people gather in one place. Still, whilst the idea went down the drain as regards individual tracking of mobility, smartphone data seems to provide reliable data for observing entire clusters of people, and the way those clusters flow across space. You can consult Jia, J. S., Lu, X., Yuan, Y., Xu, G., Jia, J., & Christakis, N. A. (2020). Population flow drives spatio-temporal distribution of COVID-19 in China. Nature, 1-5. (https://www.nature.com/articles/s41586-020-2284-y?sf233344559=1) .
Bonaccorsi, G., Pierri, F., Cinelli, M., Flori, A., Galeazzi, A., Porcelli, F., … & Pammolli, F. (2020). Economic and social consequences of human mobility restrictions under COVID-19. Proceedings of the National Academy of Sciences, 117(27), 15530-15535 (https://www.pnas.org/content/pnas/117/27/15530.full.pdf ) show an interesting economic aspect of the pandemic. Restrictions in mobility give the strongest economic blow to the poorest people and to local communities marked by relatively the greatest economic inequalities. Restrictions imposed by governments are one thing, and self-imposed limitations in spatial mobility are another. If my intuition is correct, namely that we will be spontaneously modifying and generally limiting our social interactions, in order to protect ourselves from COVID-19, those changes are likely to be the fastest and the deepest in high-income, low-inequality communities. As income decreases and inequality rises, those adaptive behavioural modifications are likely to weaken.
As I am drawing a provisional bottom line under that handful of scientific papers, my initial hypothesis seems to hold. We do modify, as a species, our social patterns, towards more encapsulated social circles. There is a process of learning taking place, and there is no mistake about it. That process of learning involves a downwards recalibration in the average territory of activity, and smart selection of people whom we hang out with, based on what we know about the epidemic risk they convey. This is a process of learning by trial and error, and it is locally idiosyncratic. Idiosyncrasies seem to be somehow correlated with differences in wealth. Income and accumulated capital visibly give local communities an additional edge in the adaptive learning. On the long run, economic resilience seems to be a key factor in successful adaptation to epidemic risk.
Just to end up with, here you have an educational piece as regards Business models in the Media Industry #4 The gaming business[ Media BM 4 2020-09-02 10-42-44; https://youtu.be/KCzCicDE8pc]. I study the case of CD Projekt (https://www.cdprojekt.com/en/investors/ ), a Polish gaming company, known mostly for ‘The Witcher’ game and currently working on the next one, Cyberpunk, with Keanu Reeves giving his face to the hero. I discover a strange business model, which obviously has hard times to connect with the creative process at the operational level. As strange as it might seem, the main investment activity, for the moment, consists in terminating and initiating cash bank deposits (!), and one of the most important operational activities is to push further in time the moment of officially charging customers with some economically due receivables. On the top of all that, those revenues deferred into the future are officially written in the balance sheet as short-term liabilities, which CD Projekt owes to…whom exactly?
Healthily dosed meanness
I am connecting the dots, progressively. People tend to, by the way. Essentially, all that stuff called ‘civilisation’ consists in people figuring s**t out, progressively.
I am connecting two paths of my educational content, i.e. the account of my investment experience in the stock market, and urban economics, on the one hand, with a third one, namely the philosophy of science and especially the concept of truth, on the other hand.
My so-far adventure with the philosophy of science allows me to approach truth under different angles. One of the most down-to-earth tests for truth is the capacity to recognize when someone is lying to me. From the perspective of Pierre Simon, marquis de Laplace, I can recognize a lie when the things which someone tells me are endowed with very low probability of happening, given the knowledge I already have about the phenomena concerned. Gotcha’, f**ker! You went too far into and under the tail of the curve which sets my distribution of probability. Here, a bit accidentally, Pierre Simon, marquis de Laplace, sort of agrees with Sir George Maynard Keynes, when he wasn’t even a Sir yet, as for the theory of probability. Agreement is reached as regards the claim that in practical life choices, the kind of probability that matters to us is the probability of claims we make about reality, whilst the strictly speaking probability of single phenomena happening in a given place and time is nice to know, yet of little utility in daily life.
If, alternatively, I follow the hermeneutic take by Hans Georg Gadamer, and you, my friend tell me things which are ugly, in the first place, and do not match at all the patterns of my historically grounded culture, you are probably telling me lies. If I take still another turn, and follow the recently formulated Interface Theory of Perception (Hoffman et al. 2015; Fields et al. 2018), lies are claims which contradict my empirically grounded knowledge about the way I can have the best possible payoffs from interactions with my environment.
The truth is that truth is complex and requires experience, judgment and healthily dosed meanness. That being said, let’s tackle the two problems at hand: my investment in the stock market, and the civilizational role of cities as demographic anomalies. As regards the former, here is the deal. My next instalment of investment comes. Every month, I invest in the stock market the rent which I collect from an apartment in town (i.e. in Krakow, Poland), roughly $670. Every month, I reconsider my investment portfolio and I decide what to buy, and what to sell. I am going to use the theories of truth which I tentatively outlined in the preceding paragraphs, in order to approach my next investment decision in strict scientific terms. Theories of truth will serve me to assess the well-founded of my decisions. Roughly speaking, when I choose between a limited number of alternative options, I can claim, about each of them, that this specific way to do things is the best one. If that claim is true, I can assume that it is truly the best option. Theories of truth are used here to assess the veracity of situation-specific claims. As I think about it, things are going to turn really funny if I come to the conclusion that I can label more than one option as truthfully the best. We’ll live, we’ll see. Anyway, here comes the video content: Invest 5 2020-09-02 07-55-26 ; https://youtu.be/SXqKhdLuFDM .
As I have been doing my research on the civilizational role of cities, I have kept repeating and I still maintain that cities are demographic anomalies with a purpose. I am going to use those theories of truth as an intellectual toolbox for nailing down precisely the phenomenon of demographic anomaly. In other words, I want to determine which specific spatial distribution of human population can be truthfully labelled as anomalous, and, on the top of that, I want to assess, just as truthfully, what is the most likely scenario of change in urban life, urban economics and city management under the impact of COVID-19. In this case, theories of truth serve me to assess the veracity of general, theoretical claims. Here is the video on You Tube: Cities 3 2020-09-02 08-38-47 ; https://youtu.be/MswEKL7BNl8 .
I am using theories of truth in two different contexts, namely one situationally specific, and another one theoretically general, and, in my next step, I take on describing those contexts more abundantly. The context of investment decision comes with an important trait, as the philosophy of science comes, i.e. with an apparently clear, yet a bit blurry a distinction between assumptions and hypotheses.
 Laplace, Pierre Simon, marquis de, 1795 – 1902, A Philosophical Essay on Probabilities, Project Gutenberg EBook, #58881
 Keynes, John Maynard, 1921, A Treatise On Probability, McMillan and Co., Project Gutenberg Ebook #32625
 Gadamer, Hans Georg, 2004, Truth And Method, 2nd, revised edition, Continuum Books, ISBN 08264 7697X
 Hoffman, D. D., Singh, M., & Prakash, C. (2015). The interface theory of perception. Psychonomic bulletin & review, 22(6), 1480-1506.
 Fields, C., Hoffman, D. D., Prakash, C., & Singh, M. (2018). Conscious agent networks: Formal analysis and application to cognition. Cognitive Systems Research, 47, 186-213. https://doi.org/10.1016/j.cogsys.2017.10.003
Fire and ice. A real-life business case.
I keep going along the frontier between my scientific research, my small investment business, and my teaching. In this update, I bring you two typically educational pieces of content, one sort of astride educational and practical investment decisions of my own, and finally I give slightly educational an account of a current business decision I am taking.
In the video entitled ‘My investment experience, my teaching and my science #3 BMW, Daimler and Volkswagen’ [ Invest 3 2020-08-26 14-02-22 ; https://youtu.be/Vot6QMXp7UA ], I discuss those three investment positions in my portfolio. Three German automotive companies. Same industry, same country, same macroeconomic environment, and yet three different performances in terms of return on investment. In this video, you can see me developing on the distinction between long term-trends and short-term variations, as well as trying to connect technical analysis of price trends with fundamental analysis of their half-annual reports.
I have place on You Tube two pieces of content in the stream of teaching designated as ‘Urban Economics and City Management’. ‘Urban Economics and City Management #1 Lockdowns in pandemic and the role of cities’ [ Cities 1 2020-08-27 08-57-15; https://youtu.be/fYIz_6JVVZk ] recounts and restates my starting point in this path of research. I browse through the main threads of connection between the pandemic of COVID-19 and the civilisational role of cities. The virus, which just loves densely populated places, makes us question the patterns of urban life, and makes us ask question as for the future of cities.
In ‘Urban Economics and City Management #2 Case study of REIT: Urban Edge and Atrium [Cities 2 2020-08-27 11-00-52 ; https://youtu.be/BURimdfpxcY ], I study the cases of two REITs, i.e. Real Estate Investment Trusts, namely Urban Edge (U.S.) and Atrium (Central Europe), with two assumptions. Firstly, cities can grow and evolve, when the local humans master the craft of agglomerating in one, relatively tiny place, the technologies of construction, sanitation, transportation, energy supply etc., and to parcel those technologies into marketable goods. Secondly, rental and lease of real estate are parcelled, marketable urban technologies.
In the video ‘My investment experience, my teaching and my science #4 The Copernic project’, [ Invest 4 Copernic 2020-08-30 08-57-54 ; https://youtu.be/_6klh0AwJAM ], I am developing on a topic exactly at the intersection of those three: the Copernic project. Honestly, this is complex stuff. I hesitated to choose this topic as educational material, yet I have that little intuition that good teachers teach useful skills. I want to be a good teacher, and the s**t I teach, I want it to be useful for my students. Life is complex and brutal, business is complex and brutal, and, as a matter of fact, each of us, humans, is complex and brutal. Fake simplicity is for pussies.
Thus, whoever among my students reads this update and watches the accompanying video material, is going to deal with real stuff, far beyond textbooks. This is a business which I am thinking about engaging in, and I am just starting to comprehend its patterns. This update is a living proof and test how good I am, or how I suck, at grasping business models of the digital economy.
In educational terms, I am locating the content relative to Copernic project in the path of teaching which I labelled ‘My investment experience, my teaching and my science’, as I am entertaining the idea of investing in the Copernic project. The subject cuts comprehensively across and into many aspects of economics and management. It can be considered as useful material for any educational path in these major fields.
It started when I reacted to a piece of advertising on Facebook. Yes, many interesting stories start like that, nowadays. It was an ad for the Copernic project itself. Here you have a link to Copernic’s website – https://copernic.io/ – but keep in mind that it is only Polish version, at least for the moment. I will do my best to describe the project in English.
Copernic is both the name of the project, and the name of an LLP (Limited Liability Partnership), incorporated under Polish law, in Krakow, Poland. The commonly used Polish acronym for an LLP is ‘sp. Z o.o.’, however, as I write in English, I will keep using the name ‘Copernic LLP’. I checked this company in the Judicial Register (of incorporated entities) run by the Ministry of Justice of the Republic of Poland, under the link https://ekrs.ms.gov.pl/web/wyszukiwarka-krs/strona-glowna/index.html . A business story emerges. On December 6th, 2019, Copernic LLP is founded, under the register #817764, in Gdansk, Poland, technically by two partners: a physical person and another LLP, i.e. TTC Trade LLP (register #788023). Yet, after scratching the surface, the surface being the Judicial Register, I discovered that TTC Trade LLP is wholly owned by the same physical person who was its partner in Copernic LLP. Anyway, the physical person apported 1000 PLN and took 1 partner share, whilst her LLP paid in 4000 PLN in exchange of 4 partner shares. By the way, PLN stands for Polish zloty and it comes like PLN 1 = $0,27.
On May 6th, 2020, the physical person who founded Copernic LLP steps out of the partnership, and her own LLP, TTC Trade, sells two of its two partner shares in Copernic LLP, to Sapiency LLP (https://sapiency.io/en/, register #789717) incorporated in Krakow, Poland, at their face value of 2000 PLN. On the same day, the partnership contract is being reformulated entirely and signed anew, including a change of headquarters, which move from Gdansk to Krakow, Poland. By the same occasion, another corporate partner steps in, namely Reset Sun Energy LLP (Konin, Poland, register #802147) and takes 2 partner shares in Copernic LLP, for a price of 2000 PLN. By the same means, the total partners’ equity in Copernic LLP moves from 5000 PLN to 6000 PLN.
On July 20th, 2020, TTC Trade LLP and Reset Sun Energy LLP both sell their partner shares in Copernic LLP to Sapiency LLP, at face value, i.e. 6000 PLN. We have an interesting legal structure, when one Limited Liability Partnership (Copernic) is wholly owned by another Limited Liability Partnership (Sapiency), which, in turn, is 50/50 owned by two gentlemen, one of whom I had the honour to meet in person. Cool guy. Fire and ice in one. A bit like me.
Sapiency is mostly active in cryptocurrencies. They make Blockchain-based tokens for whoever asks, and I think their main technological platform is Ethereum (https://ethereum.org/en/). The marketing model is membership-based, thus oriented on long-term relations with customers. The business model of Copernic LLP is logically connected to that of Sapiency LLP. Copernic builds solar farms in Poland, and markets Blockchain-based tokens labelled Copernic1, at a face value of 4 PLN apiece. Each such token corresponds to a share in the future leasing of solar farms, and those farms, by now, are under actual or planned construction. Later on, i.e. after the solar farms become operational, those lease-connected Copernic1 tokens are supposed to give their holders a claim on secondary tokens CopernicKWH, which, in turn, correspond to claims on electricity generated in those solar farms. The first attribution of CopernicKWH tokens to the holders of Copernic1 tokens is supposed to take place within 14 days after the first photovoltaic farm becomes operational with Copernic LLP, with a standing power of at least 1 MW. That day of operational capacity can be a movable feast, and thus the official statute of those tokens stipulates that the first attribution of CopernicKWH will take place not later than January 1st 2021. After the first attribution of CopernicKWH, subsequent attributions to the holders of Copernic1 are supposed to take place at least once a week.
The CopernicKWH tokens can be used as means of payment at the Kanga Exchange (https://kanga.exchange ), which looks cool, on the whole, with one exception. According to Kanga’s own statement, ‘Kanga Exchange is operated by Good Investments Ltd, registered in accordance with the International Business Companies Act of the Republic of Seychelles, Company Number 192185’ (https://support.kanga.exchange/company-information/ ). Just for your information: I can incorporate a business in Seychelles without getting up from my desk, 100% online, for the modest sum of 399 British Pounds (https://www.offshoreformations247.com/offshore-jurisdictions/seychelles). I am fully aware how bloody hard it is to set up any business structure connected to cryptocurrencies in the European legal environment, however… Seychelles? Seriously?
The average price of electricity in Poland, when I am writing those words, is around 0,617 PLN per 1 kWh. One Copernic1 token, with its current price of 4 PLN, corresponds to 4/0,617 = 6,48 kWh of energy. Assuming that every week, starting from the day 0 of operations at the solar farm, Copernic LLP attributes me 1 CopernicKWH token for each Copernic1 token in my possession, I break even after 7 weeks, and each consecutive week brings me a net profit.
I do my maths according to the logic of the capital balance sheet. First of all, I want to compute the book value of assets that corresponds to the planned solar farm of 1 megawatt in standing power. In a report published by the International Renewable Energy Agency (IRENA https://irena.org ), entitled ‘Renewable Power Generation Costs in 2019’ (https://irena.org/publications/2020/Jun/Renewable-Power-Costs-in-2019 ), I can read that the average investment needed for 1 watt of power in a photovoltaic installation can be cautiously estimated at $0,38, thus PLN 1,40.
Building a solar farm of 1 MW, thus of a million watts in terms of electric power, means an investment of at least PLN 1,40 * 106 = PLN 1 400 000. To that, you need to add the price of acquiring land. At the end of the day, I would tentatively put a PLN 2 million capital tag on the project. Supposing that capital for the project comes from the sales of Copernic1 tokens, Copernic LLP needs to sell at least 2 000 000 PLN/ 4 PLN = 500 000 of them Copernic1.
Looks like a lot, especially for a Limited Liability Partnership with partner equity at 6000 PLN. Assets worth PLN 2 000 000 minus PLN 6000 in partner equity means PLN 1 994 000 = $ 538 919 in capital which is not clear at all where it is supposed to come from. The sole partner in Copernic LLP, namely Sapiency LLP could pay in additional equity. Happens all the time. Still, Sapiency LLP as a partner equity of PLN 5000. See what I mean? Another option is a massive loan, and, finally, the whole balance sheet could rely mostly on those Copernic1 tokens. Only those tokens are supposed to embody claims on the lease of the solar farm. Now, legally, a lease is a contract which gives to the lessee (the one who physically exploits), the right to exploit things or rights owned by the lessor (the one who graciously allows others to exploit). In exchange, the lessee pays a rent to the lessor.
There are two things about that lease of solar farms. A lease is not really divisible, as it is the right to exploit something. If you divide that something into smaller somethings, you split the initial lease into as many separate leases. If I buy one Copernic1 token and that token embodies claims derived from a lease contract, what specifically is the object of leasing? There is another thing. If I buy Copernic1 tokens, it gives me claims on the future CopernicKWH tokens. In other words, Copernic will pay me in the future. If they pay me, on the basis of a lease contract, it is as if they were paying me a rent, i.e. as if they were leasing that solar farm from me. Only I don’t have that solar farm. They will have it. Yes, indeed, WTF? This is the moment to ask that rhetorical question.
A few paragraphs ago, I wrote that I am entertaining the idea of investing in those Copernic1 tokens. I think the idea has become much less attractive, business-wise, whilst becoming much more entertaining. There is an important question, though. Isn’t it ethically advisable to invest in renewable energies, even if the legal scheme is a bit sketchy, just to push forward those renewables? I can give an answer in two parts to that question. Firstly, renewables grow like hell, both in terms of power supplied, and in terms of attractiveness in financial markets. They really don’t need any exceptional push. They walk, and even run on their own legs. Secondly, I worked through my own ideas for implementing new technologies in the field of renewable energies, and, notably, I worked a lot with a tool called ‘Project Navigator’, run by the same International Renewable Energy Agency which I quoted earlier. The link is here: https://irena.org/navigator . There is one sure takeaway I have from working with that tool: a good project needs a solid, transparent, 100% by-the-book institutional base. Wobbly contracts translate into wobbly financing, and that, in turn, means grim prospects for the project in question.
Another doubt arises in my mind, as I do flows instead of balances. A solar farm needs to earn money, i.e. to make profit, in order to assure a return on investment. The only asset which can earn value over time is land in itself. In practical terms, as long as we want that solar farm to work, it needs to generate a positive operational cash flow. Photovoltaic equipment ages inexorably, by physical wear and tear as well as by relative moral obsolescence. That aging can assure substantial amortization, yet you need some kind of revenue which you can write that amortization off from. If all or a substantial part of energy produced in the solar farm is tokenized and attributed to the holders of Copernic1, lease-based tokens, there could be hardly any energy left for sale, hence not much of a revenue. In other words, the system of initial financing with tokens can jeopardize economic payoff from the project, and that’s another thing I learnt with the Project Navigator: you need a solid economic base, and there is no way around it.
The hopefully crazy semester
Another handful of educational material, for the apparently (hopefully) crazy semester at the university. Crazy because of the virus, stands to reason. Things are never crazy because we make them so, stands to reason, once again.
I am making a big, fat bottom line at my investment portfolio in the stock market, and I am using this opportunity to make some educational material. The point of using my experience in education. It is personal experience, important to enrich theory. It is a story of personal limitations in business decisions, and understanding those limitations is important for understanding microeconomics as the substance of decisions, macroeconomics as their context, and management as their execution.
I have successful experience, together with hindsight on the mistakes I made. I can utilize it as valuable material to share and to build some teaching on. Since January 2020, I have invested $7 924,76 in the stock market, and today (August 25th, 2020), my investment portfolio is worth $11 719,91. I have 47,89% of return on the cash invested, over a period of 7 months. Not bad for a theoretician, isn’t it? I am deeply convinced that personal experience is impossible to bypass in any true teaching. Whatever kind of story I am telling on the moment, I always tell the story of my own existence. I can make it genuine and truthful just as well. Here is the link to the first, introductory video in this path: ‘My investment experience, my teaching and my science #1’ [Invest 1 2020-08-25 11-54-58 ; https://youtu.be/uYm0xB322u0 ]
In the second video of the same series [Invest 2 2020-08-26 07-37-08; https://youtu.be/XqYbe_LMdhY ], I focus on the presentation of my investment portfolio. I stress two points. Firstly, the portfolio which I hold now is the cumulative outcome of past trials and errors. Secondly, my portfolio shows many alternative scenarios of what could possibly have happened to my money, had I invested in just one among the 27 positions, thus if I had not diversified. I could have made +313% or -49%, instead of the 48% I had made as of August 25th 2020. I study more fundamentally the case of General Electric, which is one of my financial failures as for now. Turns out they have stakes in aviation, and that sucks in the times of pandemic.
In the third video of the series ‘Business Models in the Media Industry’ [Media BM 3 2020-08-26 08-24-42; https://youtu.be/bbmdsTaY7Lg ] I focus more in depth on studying the case of Netflix. You can have a glimpse of their transition from a streamer of externally made content to a business based on in-house made content. You can also see how strongly their business model is grounded in the assumption of constant growth in size.
In my second video devoted to Political Systems [PolitSys 2 2020-08-26 09-02-47; https://youtu.be/iRxwZDKlDxM ] I use two cases, i.e. the constitutions of France and Finland, to give my readers, followers and students a first glimpse on forms of political power. You can see that general concept in the context of distinction between a presidential system (France) vs a Parliamentary one (Finland).
Business models and the nature of truth – back to school #2
I am introducing another handful of educational content in the form of video tutorials.
The video recorded on August 23rd, noon sharp, is the first in a separate path of teaching devoted to Political Systems. The link to You Tube is here: PolitSys 2020-08-23 11-16-44 (https://youtu.be/J_78zBEFFNE ). The video introduces two case studies: the constitution of Uganda (https://discoversocialsciences.com/wp-content/uploads/2020/08/Uganda-Constitution.pdf ) and the constitution of India (https://discoversocialsciences.com/wp-content/uploads/2019/10/Con-Of-India-updated-as-31072018.pdf ). In terms of theory, two articles are hinted at: Almond, G. A. (1956). Comparative Political Systems. The Journal of Politics, 18(3), 391-409 (https://www.jstor.org/stable/2127255?seq=1 ), and Easton, D. (1957). An approach to the analysis of political systems. World Politics: A Quarterly Journal of International Relations, 383-400 (https://www.jstor.org/stable/2008920?seq=1 ). General concepts which you will find developed in this video are:
>> Constitution as a double-function tool: the set of rules for the political game, and the foundation of the national legal system
>> Constitutional systems as paradoxes: rules of the very brutal political game put together, in the same document, with ambitious ethical principles for the entire nation.
>> The principle of national sovereignty
>> The method of studying constitutions by simulated removal and negation of rules
Material recorded on Monday, August 24th, 2020 (Econ Basics 1 2020-08-24 08-02-06 ; https://youtu.be/OTGjJGfpdoc ) contains the first, more or less formalized lecture in the fundamentals of economics. I use five essential readings – Netflix Annual Report 2019, Discovery Annual Report 2019, Adam Smith’s ‘Wealth of Nations’, David Ricardo’s ‘Principles of Political Economy and Taxation’, and Carl Menger’s ‘Principles of Economics’ – in order to show the basis axes of approach to economic sciences. Firstly, it is the special social tension between the diversity of skills and social roles, on the one hand, and the fact of them all summing up to one big body of labour (Smith). Secondly, I introduce the distinction between capital and labour, and the importance of capital resources (Ricardo, example Netflix). Thirdly, and finally, I present the concept of economic good (Carl Menger) and the importance of translating technology into products.
The video recorded slightly later on August 24th, 2020 (Renew BM 2 2020-08-24 09-35-20; https://youtu.be/VnwLLCDFXS8 ) is the second educational piece in the stream devoted to Business Models in the industry of Renewable Energies. I stay with the two business cases from the first video, i.e. First Solar Inc. and SMA Solar Technology AG, and I focus on connecting their capital accounts – their respective BALANCE SHEETS – to their business models. In terms of the capital base, First Solar is six times bigger than SMA. First Solar’s business model is based, capital-wise, on using retained earnings and additional paid-in capital to finance property, plant, equipment and a large reserve of cash. As regards SMA Solar, they mostly use retained earnings and long-term, complex contractual debt in order to finance factories and large inventories. What emerges as a common denominator between the two is the stream of capital from retained earnings to the financing of fixed productive assets.
In the second video focused on business models in the media industry (Media BM 2 2020-08-24 13-42-46; https://youtu.be/jZKvNfopShM ), I keep working with two business cases: Netflix, and Discovery Communications. This time, I focus on deconstructing a business model out of the capital account, i.e. from the balance sheet of a company. I present it in the form of a game, which I frequently practice in class with my students: I ask them to identify the biggest numbers (financial aggregates) on both the active and the passive side of the balance sheet. I demonstrate this exercise in this video and explain how you can use the balance sheet to guess the fundamental traits of a business model.
I am also putting online a second video in the educational path devoted to the philosophy of science (Phil Science 2 2020-08-24 14-17-58; https://youtu.be/sCI66lARqAI ). I am investigating the nature of truth, with three basic readings: Philosophical Essay on Probabilities’ by Pierre Simon, marquis de Laplace, ‘Truth and Method’ by Hans Georg Gadamer, and an article entitled ‘Conscious agent networks: Formal analysis and application to cognition’, by Chris Fields, Donald D. Hoffman, Chetan Prakash, and Manish Singh. I briefly discuss the limitations we, humans, encounter when trying to discover truth about reality.
A flow I can ride, rather than a storm I should fear
I am in an intellectually playful frame of mind, and I decide to play with Keynes and probability. It makes like 4 weeks that I mess around with the theory of probability, and yesterday my students told me they have a problem with Keynes. I mean, not with Sir John Maynard Keynes as a person, but more sort of with what he wrote. I decided to connect those two dots. Before John Maynard Keynes wrote his ‘General Theory of Employment, Interest, and Money’, in 1935, he wrote a few other books, and among them was ‘A Treatise on Probability’ (1921).
I am deeply convinced that mathematics expresses our cognitive take on that otherwise little known, chaotic stuff we call reality, fault of a better label. I am going to compare John Maynard Keynes’s approaches to, respectively, probability and economics, so as to find connections. I start with the beginning of Chapter I, entitled ‘The Meaning of Probability’, in Keynes’s Treatise on Probability,
‘Part of our knowledge we obtain direct; and part by argument. The Theory of Probability is concerned with that part which we obtain by argument, and it treats of the different degrees in which the results so obtained are conclusive or inconclusive. In most branches of academic logic, such as the theory of the syllogism or the geometry of ideal space, all the arguments aim at demonstrative certainty. They claim to be conclusive. But many other arguments are rational and claim some weight without pretending to be certain. In Metaphysics, in Science, and in Conduct, most of the arguments, upon which we habitually base our rational beliefs, are admitted to be inconclusive in a greater or less degree. Thus for a philosophical treatment of these branches of knowledge, the study of probability is required. […] The Theory of Probability is logical, therefore, because it is concerned with the degree of belief which it is rational to entertain in given conditions, and not merely with the actual beliefs of particular individuals, which may or may not be rational. Given the body of direct knowledge which constitutes our ultimate premises, this theory tells us what further rational beliefs, certain or probable, can be derived by valid argument from our direct knowledge. This involves purely logical relations between the propositions which embody our direct knowledge and the propositions about which we seek indirect knowledge. […] Writers on Probability have generally dealt with what they term the “happening” of “events.” In the problems which they first studied this did not involve much departure from common usage. But these expressions are now used in a way which is vague and ambiguous; and it will be more than a verbal improvement to discuss the truth and the probability of propositions instead of the occurrence and the probability of events’.
See? Something interesting. I think most of us connect the concept of probability to that experiment which we used to perform at high school: toss a coin 100 times, see how many times you have tails, and how many occurrences of heads you had etc. Tossing a coin is empirical: we make very little assumptions and we just observe. How is it possible, then, for anybody to even hypothesise that probability is a science of propositions rather than hard facts?
Now, here is the thing with John Maynard Keynes (and I address this passage to all those of my students who struggle with understanding what the hell did John Maynard mean): John Maynard Keynes had a unique ability to sell his ideas, and his ideas came from his experience. Whatever general principles you can read in Keynes’s writings, and however irrefutable he suggests these principles are, John Maynard tells us the same kind of story that everybody tells: the story of his own existence. He just tells it in so elegantly sleek a way that most people just feel disarmed and conquered. Yet, convincing is not the same as true. Even the most persuasive theorists – and John Maynard Keynes could persuade the s**t out of most common mortals – can be wrong. How can they be wrong? Well, when I fail to own my own story, i.e. when I am just too afraid of looking the chaos of life straight in the eyes (which is elegantly called ‘cognitive bias’), then I tell just the nice little story which I would like to hear, in order to calm down my own fear.
Let’s try to understand John Maynard Keynes’s story of existence, which leads to seeing probabilities as a type of logic rather than data. I browse through his ‘Treatise on Probability’. I’m patient. I know he will give himself away sooner or later. Everybody does. Well, let’s say that according to my experience of conversations with dead people via their writings, each of them ends up by telling me, through his very writing, what kind of existential story made him tell the elegantly packaged theoretical story in the title of the book. Gotcha’, Sir Keynes! Part I – Fundamental Ideas – Chapter III, ‘The Measurement of Probabilities’, page 22 in the PDF I am linking to: ‘If we pass from the opinions of theorists to the experience of practical men, it might perhaps be held that a presumption in favour of the numerical valuation of all probabilities can be based on the practice of underwriters and the willingness of Lloyd’s to insure against practically any risk. Underwriters are actually willing, it might be urged, to name a numerical measure in every case, and to back their opinion with money. But this practice shows no more than that many probabilities are greater or less than some numerical measure, not that they themselves are numerically definite. It is sufficient for the underwriter if the premium he names exceeds the probable risk. But, apart from this, I doubt whether in extreme cases the process of thought, through which he goes before naming a premium, is wholly rational and determinate; or that two equally intelligent brokers acting on the same evidence would always arrive at the same result. In the case, for instance, of insurances effected before a Budget, the figures quoted must be partly arbitrary. There is in them an element of caprice, and the broker’s state of mind, when he quotes a figure, is like a bookmaker’s when he names odds. Whilst he may be able to make sure of a profit, on the principles of the bookmaker, yet the individual figures that make up the book are, within certain limits, arbitrary. He may be almost certain, that is to say, that there will not be new taxes on more than one of the articles tea, sugar, and whisky; there may be an opinion abroad, reasonable or unreasonable, that the likelihood is in the order—whisky, tea, sugar; and he may, therefore be able to effect insurances for equal amounts in each at 30 per cent, 40 per cent, and 45 per cent. He has thus made sure of a profit of 15 per cent, however absurd and arbitrary his quotations may be’.
See? Told you he’s got a REAL story to tell, Sir Keynes. You just need to follow him home and see whom he’s hanging with. He is actually hanging with financial brokers and insurers. He observes them and concludes there is no way of predicting the exact probability of complex occurrences they essentially bet money on. There is some deeply intuitive mental process taking place in their minds, which makes them guess correctly if insuring a ship full of cotton, for reimbursable damages worth X amount of money, in exchange of an insurance premium worth Y money.
The story that John Maynard Keynes tells is through his ‘Treatise on Probability’ is the story of the wild, exuberant capitalism of the early 1920ies, right after World War I, and after the epidemic of Spanish flu. It was a frame of mind that pushed people to run towards a mirage of wealth, and they would run towards it so frantically, because they wanted to run away from memories of horrible things. Sometimes we assume that what’s can possibly catch us from behind is so frightening that whatever we can run towards is worth running forward. In such a world, probability is a hasty evaluation of odds, with no time left for elaborate calculations. There are so many opportunities to catch, and so much fear to run away from that I don’t waste my time to think what an event actually is. It is just the ‘have I placed my bets right?’ thing. I think I understand it, as I recently experienced very much the same (see A day of trade. Learning short positions).
The very same existential story, just more seasoned and marinated in the oils of older age, can be seen in John Maynard Keynes’s ‘General Theory of Employment, Interest, and Money’. I read the ‘Preface’, dated December 13th, 1935, where the last paragraph says: ‘The composition of this book has been for the author a long struggle of escape, and so must the reading of it be for most readers if the author’s assault upon them is to be successful,—a struggle of escape from habitual modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds’. The same line of logic is present in country-specific prefaces that follow, i.e. to national translations of ‘General Theory’ published in Germany, France, and Japan.
In 1935, John Maynard Keynes had lived the exuberance of the 1920ies and the sobering cruelty of the 1930ies. He felt like telling a completely new story, yet the established theory, that of classical economics, would resist. How can you overcome resistance of such type? One of the strategies we can use is to take the old concepts and just present them in a new way, and I think this is very largely what John Maynard Keynes did. He took the well-known ideas, such as aggregate output, average wage etc., and made a desperate effort to reframe them. In the preface to the French edition of ‘General Theory’, there is a passage which, I believe, sums up some 50%, if not more, of all the general theorizing to be found in this book. It goes: ‘I believe that economics everywhere up to recent times has been dominated, much more than has been understood, by the doctrines associated with the name of J.-B. Say. It is true that his ‘law of markets’ has been long abandoned by most economists; but they have not extricated themselves from his basic assumptions and particularly from his fallacy that demand is created by supply. Say was implicitly assuming that the economic system was always operating up to its full capacity, so that a new activity was always in substitution for, and never in addition to, some other activity. Nearly all subsequent economic theory has depended on, in the sense that it has required, this same assumption. Yet a theory so based is clearly incompetent to tackle the problems of unemployment and of the trade cycle. Perhaps I can best express to French readers what I claim for this book by saying that in the theory of production it is a final break-away from the doctrines of J.- B. Say and that in the theory of interest it is a return to the doctrines of Montesquieu’.
Good. Sir Keynes assumes that it is a delicate thing to keep the economic system in balance. Why? Well, Sir Keynes knows it because he had lived it. That preface to the French edition of ‘General Theory’ is dated February 20th, 1939. We are all the way through the Great Depression, Hitler has already overtaken Austria and Czechoslovakia, and the United States are in the New Deal. Things don’t balance themselves by themselves, it is true. Yet, against this general assumption of equilibrium-is-something-precarious, the development which follows, in ‘General Theory’ goes exactly in the opposite direction. John Maynard Keynes builds a perfect world of equations, where Savings equal Investment, Investment equals Amortization, and generally things are equal to many other things. Having claimed the precarity of economic equilibrium, Sir Keynes paints one in bright pink.
I think that Keynes tried to express radically new ideas with old concepts, whence the confusion. He wanted to communicate the clearly underrated power of change vs that of homeostasis, yet he kept thinking in terms of, precisely, homeostasis between absolute aggregates, e.g. the sum of all proceedings anyone can have from a given amount of business is equal to the value conveyed by the same amount of business (this is my own, completely unauthorized summary of the principle, which Keynes called ‘effective demand’).
The ‘General Theory of Employment, Interest, and Money’ was somehow competing for the interest of readers with another theory, phrased out practically at the same moment, namely the theory of business cycles by Joseph Alois Schumpeter. I perceive the difference between the respective takes by Keynes and Schumpeter, on the general turbulence of existence, in the acknowledgment of chaos and complexity. Keynes says: ‘Look, folks. This, I mean that whole stuff around, is bloody uncertain and volatile. Still, the good news is that I can wrap it up, just for you, in an elegant theory with nice equations, and then you will have a very ordered picture of chaos’. Joseph Alois Schumpeter retorts: ‘Not quite. What we perceive as chaos is simply complex change, too complex for being grasped once and for all. There is a cycle of change, and we are part of the cycle. We are in the cycle, not the other way around (i.e. cycle is not in us). What we can understand, and even exploit, is the change in itself’.
Where do I stand in all that? I am definitely more Schumpeterian than Keynesian. I prefer dishevelled reality to any nicely ordered and essentially false picture thereof. Yes, existence is change, and any impression of permanence is temporary. My recent intellectual wrestling with stochastic processes (see We really don’t see small change) showed me that even when I use quite elaborate analytical tools, such as mean-reversion, I keep stumbling upon my purely subjective partition of perceivable reality into the normal order, and the alarming chaos (see The kind of puzzle that Karl Friedrich was after).
A vision of game comes to my mind. This is me vs universe. Looks familiar? Right you are. That’s exactly the kind of game each of us plays throughout time. I make a move, and I wait for the universe to make its own. I have a problem: I don’t really know what kind of phenomenon I can account as move made by the universe. I need to guess: has the universe already made its move, in that game with me, or not yet? If I answer ‘yes’, I react. I assume that what has just happened is informative about the way my existence works. If, on the other hand, I guess that the universe has not figured yet any plausible way to put me at check, I wait and observe. Which is better, day after day: assuming that the universe made its move or sitting and waiting? I can very strongly feel this dilemma in my learning of investment in the stock market. Something happened. Prices have changed. Should I react immediately, or should I wait?
I provisionally claim that it depends. The universe moves at an uneven speed. By ‘provisionally’ I mean I claim it until I die, and then someone else will take on claiming the same, just as provisionally. Yet, all that existential instability acknowledged, there are rhythms I can follow. As regards my investment, I discovered that the most sensible rhythm to follow beats on the passive side of my investment portfolio. Every month, I collect the rent from an apartment, downtown, and I invest that rent in the stock market. I discovered that when I orchestrate my own thinking into that monthly rhythm of inflow in equity, it sort of works nicely. I collect the rent around the 5th day of each month, and for like one week beforehand, I do my homework about the market. When the rent comes, I have a scenario in mind, usually with a few question marks, i.e. with uncertainty to deal with. I play my investment game for 1 – 3 days, with occasional adjustments, and this is my move. Then I let the universe (the stock market in this case) make its own move over the next 3 – 4 weeks, and I repeat the same cycle over and over again.
I make a short move, and I let the universe making a long move. Is it a sensible strategy? From my point of view, there are two reasons for answering ‘yes’ to that question. First of all, it works in purely financial terms. I have learnt to wait patiently for an abnormally good opportunity to make profits. When I go too fast, like every day is a decision day, I usually get entangled in a game of my own illusions, and I lose money on transactions which I don’t quite understand. When I take my time, pace myself, and define a precise window for going hunting, usually something appears in that window, and I can make good money. Second of all, it is something I have sort of learnt generally and existentially: chaos is there, and I am there, and a good way to be alongside the chaos is to find a rhythm. When I follow my beat, chaos becomes a flow I can ride, rather than a storm I should fear.
A man walks into a bar, and then comes the calm duke
It’s summertime. Politicians are on holiday, hopefully, at least some of them. That’s a good thing, ‘cause when they come to work, like daily, you need to watch them constantly. You turn your back for a second, just for one second, and they come up with something. They are always up to something, those politicians, and so it is good to know what exactly are they up to.
That paragraph, I mean the one above, is an acceptably shitty attempt at the introductory joke for the study of political systems. I do research about political systems, I write serious books about them, and I lecture about them, and I did some blogging about them as well in the past, and so I think I can do some blogging about them now.
Right, so I go on with shitty jokes. A man walks in to a bar, orders a drink, and starts talking to the barman. The man is new in that particular neighbourhood. Such blokes use to ask stupid questions to barmen. This one is no exception to the rule. He goes: ‘Hi, man. Do you have any political system, here?’. The barman is an experienced on. He knows stupid questions, and he is ready to respond. ‘Yes, we do.’ He answers ‘We have a constitution. It proves we have a political system’. ‘You have a constitution? Wow, nice. But, just tell me, how do you know YOU HAVE a constitution? I mean, I understand that part about the constitution as such, but how do you know it is your constitution and not someone else’s constitution?’.
The atmosphere becomes a little tense. What did you expect, man? You ask a man who is serving you drinks how can he know the constitution he thinks is his is really his own. This is bound to raise some eyebrows. Still, the barman holds his ground. ‘This constitution has a rule, written in it, that it is in force in the territory of our country, for one. Besides, it had been enacted, way back in the days, by our Parliament, for two. It all proves it is our constitution, man. Still, good attempt, bravo.’.
‘Yeah, you’re right. If it says it is in force in your territory, it must come from here and be your own. Stands to reason. Good point. But, tell me’ – the man doesn’t give up easily – ‘isn’t it the constitution itself that defines the territory of your country? I mean, it says it is in force in the territory it says is the national territory, doesn’t it? And the Parliament, it is your Parliament because the constitution says so, and the constitution is supposed to be your constitution because it has been enacted by the Parliament it says is the proper Parliament, right? Bit of a conundrum, here, don’t you think?’.
The barman gives up. ‘Look, man. It is nice chatting with you, but I have other customers to attend. See that doorframe over there, on the right? This is Dead Brains’ Room. Go there and ask for Alex. He will tell you more about political systems’.
‘Alex? Alex what?’
‘De Toqueville. Just go there and ask. The bloke is a fundamentalist, just like you. You should get along well.’
‘A fundamentalist? Me?’
‘Yes. You like asking fundamental questions. C’mon, man. Just go there and talk to Alex’.
The Dead Brain’s Room is a strange collection of people. All kinds of styles, you would say, as if taken from different epochs and places. After asking around, the fundamentalist man finds a slender gentleman with black hair cut into that interesting, like 19th century fashion, where hair on the sides of the head seem to form half-open wings of a bird ready to take flight. He is Alexis de Toqueville. When asked about political systems, he goes into a strange tirade: ‘Amongst the novel objects that attracted my attention during my stay in the United States, nothing struck me more forcibly than the general equality of conditions. I readily discovered the prodigious influence which this primary fact exercises on the whole course of society, by giving a certain direction to public opinion, and a certain tenor to the laws; by imparting new maxims to the governing powers, and peculiar habits to the governed. I speedily perceived that the influence of this fact extends far beyond the political character and the laws of the country, and that it has no less empire over civil society than over the Government; it creates opinions, engenders sentiments, suggests the ordinary practices of life, and modifies whatever it does not produce. The more I advanced in the study of American society, the more I perceived that the equality of conditions is the fundamental fact from which all others seem to be derived, and the central point at which all my observations constantly terminated’.
The fundamentalist man tries to understand. He asked this de Toqueville guy about political systems, and, as an answer, he heard something about equality, course of society, public opinion, laws, governing powers, habits of the governed, the Government with a capital ‘G’, opinions, and sentiments.
The fundamentalist man asks Alexis de Toqueville a few more questions, just to check the background, and here it comes. Now, it makes more sense. Alexis de Toqueville made a long trip to North America, in 1831. He was supposed to visit prisons there, on the request of the French king. So, the guy went to a country completely different from his own, namely the post-Bonapartist France, and he got hooked. Fascination comes from the experience of difference. He became so fascinated with that society under construction, in the early United States of America, that he made a detailed account of the whole system.
Probably without being aware of what he was doing, de Toqueville did an exemplary study of a political system: he started with a historical sketch, just to show how the whole thing came into being, and then he intuitively focused on those aspects of the aspects of the political order. That historical nerve is probably what I appreciate the most in de Toqueville writing. You can notice, by the way, that I have just let go the joke story about that man who walked into a bar, and I am returning to my basic narrative style. That’s the thing, man: you drag a joke over too long a way, and it stops being funny at all.
Anyway, what I like about de Toqueville is his attachment to history, which is even more noticeable given the fact that history, as a real scientific discipline, needed like 2 or 3 decades more to start emerging in the intellectual landscape of Europe. I appreciate the historical approach because I am strongly attached to the idea that social structures in general, political systems included, are very largely made of habits. It is arguable to what extent those habits last over time. The French historical school is, I think, the best at showing how those habits pile up to the point of becoming dysfunctional, and then the social structure shakes off and starts accumulating new habits.
Societies are like hamsters. Each institution, developing over time in the social system, is like another grain of corn that the hamster, i.e. the government, puts in its cheek-bags. Is the hamster stupid? No, not at all. What is does is a very sensible strategy, but it has its limits. Sensible strategies usually do. The limit is the capacity of the hamster’s cheeks. They are not likely to burst, by the way. If you have ever had a hamster, you could see the incredible capacity of that little animal. It can stuff itself up to an insane volume, with that food stored for later. What comes before bursting is impediment in the hamster’s movements. The more you carry in your cheek-bags, the slower and less agile you are, hence the less able to collect new grains. This has been nicely explained by a German mathematician, Reinhard Selten. He was Nobel Prized in economics, together with John Nash and John Harsanyi, and his specific contribution was the theory of games with imperfect recall (see, for example: Selten 1975; Hammerstein, Selten 1994).
Reinhard Selten studied social games played over long periods of time. The law is one of such games. These games have a special trait: the set of players is being changed without interrupting the game. New players come in, and old players drop out. It has to alter the rules of the game, as new players bring with them a word or two about how the game should be played, or, elegantly, they bring new strategies. Now, we have a paradox. Either the coming of new players with new strategies does not change much to the game, in which case we have a rigid social game with not much adaptability, or the game adapts usefully and the new ones alter it with their ideas, but then, the game is not quite the game it used to be. There is a span of time, that Selten used to call as the span of recollection, over which the rules of the game can accommodate both the old players and the new ones. This span is limited. When the discrepancy in expectations and strategies between players who joined at different times reaches a critical point, some old rules naturally drop off the game. Social games played over long periods of time have imperfect recall, because their rules and equilibriums cannot be unequivocally traced back to the hypothetical beginning of the game.
The funny thing about political hamsters is that they like attributing their heritage to things that don’t exist and have never existed. Take the classical partition of three powers, in a government. The legislative should be separate from the executive, and both of them should be accompanied by an independent judicial power. Most people who know a bit of political theory would immediately trace this distinction back to Charles de Secondat, Baron de Montesquieu and his book ‘The Spirit of Laws’. The interesting thing is that when you read that book really carefully, you will not find any mention whatsoever of that principle of division of powers. Montesquieu made a typology of governments, but he did not postulate the division of powers. Who did, then?
Who knows? The separation of the judicial power seems to be of the earliest date, probably due to the progressive emergence of the highly specialized legal profession, century after century. The separation between the executive and the legislative, on the other hand, seems to be an American invention, and to have its roots in the executive offices established in the early British colonies in North America. Read Alexis de Toqueville on that one.
I am getting back to that embarrassing question the fundamentalist man asked to the barman: how can we know we have any political system at all? Is the presence of a constitution a sufficient premise? In general, yes, I agree. Still, there are exceptions. Take Great Britain, for example. Technically, they have a lot of constitutional law without having a written, enacted constitution in the strict sense of the term. I know, I know, there is Magna Charta Libertatum, or The Great Chart of Liberties, from 1215. I know it feels great to trace the roots of your nation’s constitutional backbone back to the 13th century, but just think of that hamster from the preceding paragraphs. Just how big the cheek-bags of the British political system would have to be in order to carry the institutions collected over more than eight centuries?
Same thing for New Zealand: there is no one, single, compound document called ‘The Constitution of New Zealand’. Still, New Zealand, just as Britain, seems to work quite smoothly, as political systems come. As a matter of fact, I am a huge fan of New Zealand’s political order. They have things, over there, which look really revolutionary, in the positive sense of the term. They have that thing, for example, that the Parliament can vote a budget it has billed like on its own, without any bill from the executive branch.
On the other hand, let’s suppose there is a constitution, but one or more political actors just don’t care, and free ride on the tide of political power. Does it mean there is no political system? Certainly not. If this is not necessarily and strictly speaking the constitution that makes a political system, then what is it? Although the constitutional track is not 100% correct, it gives an insight. Constitution is law, and this law puts order in the intricate network of hierarchies present in the given social structure. Political systems are observable through the lens of laws they enact into force, and through the predictability of behaviour in people who clearly wield power.
Law and predictability of behaviour are connected. Law is made of rules, and, generally, law is law. Still, as you dig deeper, there are two layers in law. In the first place, there is that sort of structural, framework law: the constitution, or, in the absence thereof, the rules regarding the way government should be organized, the civil code, and the criminal one as well, as we talk about codes. You know, that solid stuff that lawyers mean when they tell you in Latin, or almost: ‘Sorry, dude, but ignorantia iuris nocet’ (you get in trouble when you don’t know your law). This layer of law makes the frame of the political system. The presence, and the content, of those laws gives gravitas and predictability to what politicians do.
On the other hand, there are laws oriented on the achievement of a clear purpose, like a plan. Let’s take a case like from real life. Always embarrassing, to stick close to real life, but always instructive, as well. Recently, Australia has enacted new regulations against espionage, allegedly with the purpose to counter the Chinese interference in the Australian political system. I followed that lead a bit, and I am focusing now on one particular print, namely on the Foreign Influence Transparency Scheme Act 2018 No. 63, 2018. Someone could ask: ‘You are Polish, Mr Wasniewski, so why the hell aren’t you writing about the Polish political system, and instead, you take on those poor Australians?’. Yeah, babe, that’s the thing about writing about political systems. It is frequently safer to write about other countries than about your own. Especially now, in Poland.
Anyway, that second layer of law expresses policies, thus what the political system does. Not all policies are enacted, but many do. It depends on how flexible they are supposed to be, and what about of budgetary money they need. You want a flexible policy that does not necessarily require to divert the stream of taxpayers’ money? You keep it executive, like those presidential proclamations that President Donald Trump uses to impose tariffs on imports. You want to implement a costly policy, which requires fiscal effort, and you don’t really expect to back off in three months from now? In that case you are likely to push some bill through the legislative.
The fundamentalist man enters our bar and asks again: ‘Do you have any political system? How do you know you have any?’. Now, we, the barman, can answer in a little bit more corkscrewed a manner: ‘It depends what kind of political system you fancy, man. If you want something well hinged, sort of regular, with basic legal frame and at least some policies enacted as law, yes, we have plenty. If, on the other hand, you are thinking about something less stringent, rather something sort of like a no-holds-barred game, sorry, we are short of. You can call by that other bar, down the street, with the big « Revolutionary Republic of We Know Better » sign over their door. They should have that second kind on stock, right now. This is probably why you can hear gunshots from there, every now and then’.
All that thinking about political systems made me think of reposting a bit of my writing from last year. It is because I am deeply fascinated with the 17th century in Europe. I have sort of a gut feeling that we are leaving the peaceful world of standardized political systems, which started to build up by the end of the 18th century, and we re-enter the fascinating maze of intertwining social hierarchies of the world, which, fault of a better word, we use to label ‘feudal’. In 1675, the publishing house run by Louis Billaine, located at the Second Pillar of the Grand Salle of the Palace, at Grand Cesar, published, with the privilege of the King, a book entitled, originally, ‘Le Parfait Négociant ou Instruction Générale Pour Ce Qui Regarde Le Commerce’. In English, that would be ‘The Perfect Merchant or General Instructions as Regards Commerce’. The author was Jacques Savary. By the way, the title I provided here above is the abridged one. The full title holds in 13 lines. Master Savary wanted to be precise, and indeed he was. On 829 pages, he covers very comprehensively a lot of practical topics.
I like reading books in a hermeneutic way. It means that I try to deconstruct the context, which the book had been written in. As we are talking 17th century and French monarchy, the most important part of the context could very well be the King, and the king was the Sun King: Louis XIV of France. The second important thing in the context is d’Artagnan. Alexandre Dumas chose to put an end to his hero’s life in 1673, in a battle, identically to the death of the real d’Artagnan, or Charles de Batz de Castelmore d’Artagnan. As we are talking Louis the XIV, we are talking Jean-Baptiste Colbert, the famous minister of finance, and his active, capitalistic policies. We are talking about doing business in an environment strongly marked by the interests of the most powerful people being around. We are talking about the creation of Saint-Gobain, the manufacture of mirrors, today a global business. It was the time, when huge ambitions of the absolutist monarchy went hand in hand with a quick development of really big (I mean bloody big, really) capitalism. There were those first attempts, from the part of the Sun King, of issuing money in order to finance his military prowess. The money in question, later on disdainfully called ‘the Bernardines’, was a failure, but the idea took root (read more in: Sombart 1911 – 2001, pages 65 – 70).
So, two years after d’Artagnan’s last battle, and during the reign of the Sun King, Jacques Savary publishes that book about being a perfect merchant, in really mousquetairy an environment. How had he come up with the idea? He states it very frankly in the preface of his book: ‘For although I might have had sufficiently good a name, and sufficiently good a birth, to be employed at some higher profession, I admit that, having been destined for Commerce by my parents, it is the employment, which I occupied myself with for a long time, the care I gave it, the particular cognizance that I took of the most significant and the least things as regards it, the ventures I made with all kinds of Manufactures, the losses that I suffered there, those that I avoided, have given me enough enlightenment and enough experience for ignoring nothing that regards the Negoce’.
I am translating Master Savary’s words the best I can, yet the original is the original. Champagne is a good example. You can get your own PDF of Master Savary’s writing from www.gallica.bnf.fr , or Bibliothèque nationale de France. Anyway, before I go further in the wording of that preface, I go further hermeneutical with Master Savary. A few interesting things to notice in that first paragraph. ‘Commerce’ and ‘Negoce’ start with capital letters, so I gather it must be something important. Commerce was something slightly different than trade strictly spoken. We are in the world of capitalism based on debt, and more specifically on the bills of exchange. It will take more than an additional century (one and a half, as a matter of fact) to invent the institution of limited liability in a business. Someone could say: in there was no limited liability, it was better to rely on one’s own equity in doing business. Well, yes and no. Yes, because your own equity, contrarily to debt, will not give other people claims on you. No, because if you lose money in a venture, it is, on the whole, better to lose other people’s money than your own. Instead of chipping out of your own possessions, you can borrow money and lend money. The trick, and the art, was to find a balance between lending and borrowing, and it was mostly done with relatively liquid bills of exchange, traded by endorsement.
Those bills of exchange travelled much faster, and changed hands much more frequently than the stocks of goods they were more or less attached to. Commerce was the craft of trading both the goods, and the bills of exchange, at different speeds. Now, comes the subtle shade of Negoce in your Commerce. The merchant called ‘Negociant’ was a really big wholesaler, both in goods and in credit. The Negoce consisted in trading big amounts of goods and capital in a coordinated way. A Negociant could do business for years just by trading credit, without seeing a single barrel of rum or a single sack of corn, or, conversely, he could be an artist in recognizing, for example, good coffee, and making huge deals on it, after sniffing just one handful. A Negociant had to be good in law, in finance, in politics, occasionally in knife fighting, he must have been ready to travel frequently, and to shift elegantly between the crude conditions of an exploration trip and the splendours of Parisian parties. The life of a Negociant was capitalism with its teeth bare and a spark in the eye.
Master Savary says he was well born. He seems suggesting he could afford not to go into Negoce, and yet he did go that way. I guess he must have been the smart guy in the family, but probably not the first in line for inheritance. This is the probable reason why his parents destined him to be a merchant. So he had his teeth cut in doing Commerce, and he must have been really good at it, if, as he writes ‘The cognizance that I had acquired of the practice before being applied to Negoce, stepped from the fact that in the disputes arising ordinarily between Negociants, I endorsed a great number of arbitrages: the advantage I had derived from it is that in the study of evidence, books and personal conduct of those who had recourse to me in their disputes, I made myself sufficiently capable in all the matters the most important and the most difficult in Commerce’.
Yes, Master Savary must have been really quick on the uptake, and smart enough to conceal his speed of thinking a bit, just enough to appear as a steady, reliable arbiter. One thing that remains unclear in this short curriculum, is the order in time. Did he start as an apprentice with a Negociant and gradually became good at arbitrage? Or, maybe, he started as a lawyer and specialized in commercial arbitrage? I do not know. Anyway, he did not stay in the Negoce for ever. ‘The time came when the Commerce was so weakened and bankruptcies so frequent, that there was no security in playing one’s possessions, I judged then that I will do no bad deed by retiring and embracing another profession. An occasion presented itself, which confirmed me in this decision; for a Minister of His Serenissime Highness Monseigneur the Duke of Mantua came in France, who offered me the intendancy of his business in France and Charlville: which I accepted, and entered in the year 1660 to the service of His Serenissime Highness, in which I still am; […]’.
Right, let’s go hermeneutic once again. ‘Serenissime’ means kind of very calm in his ways. Noble born people, in the past, liked dropping this adjective in those long designations, half-name, half-social status that they used to introduce themselves. It probably meant that they wanted to appear cool and relax. ‘Peace, bro. See that Serenissime on my visit card? It means I am really calm, and I will have you executed only at your second mistake. Want a sniff?’. So, Master Savary went into the service of that Italian duke from Lombardy (this is where Mantua is). Being a duke was a good position. The difference between a duke and a prince is that the former is just the top dog in the feudal hierarchy, and the latter is of royal blood and waiting in line for sitting on the throne. Apparently, especially in Italy, being a prince was really unhealthy an occupation. You could have had those horrible hunting accidents, when a wild boar attacked you with five crossbows, and could even follow you home. Waiting in line for top offices is rough. Being a duke was safer, as you were the boss and it was kind of official and legally guaranteed. You just had to wait a few centuries, over some twelve generations, and you had that dukedom. Well, yes, you had to put your bets on the right prince, the one who didn’t get attacked frequently by wild boars with crossbows, or just had more crossbows secured on his side, together with the properly qualified labour force.
So, Master Savary started somehow (?) in the Commerce, then went into business arbitrage, which made him convinced he is really good at Negoce. He went into Negoce, did some business, earned some money, lost some money, and then decided it was not really calm an occupation. When a very calm (i.e. Serenissime) duke from Italy offered him a job, he accepted willingly. As he sketches the job in question, he says: ‘[…] in order to fulfil my obligations it was necessary for me to study the Ordinances and the Customs, as there was much business decisions based thereon; so as I committed myself to read them, and in that reading I made remarks on everything pertaining to Commerce, which served me usefully in the composition of this book. When His Majesty, willing to put a limit, by a Regulation, to the abuses that were being committed in the Negoce, had it ordered by circulating letters to Judges and Consuls, Guards and Communities of Merchants in the good towns of his kingdom to send him their memoirs on this subject, I believed it was my duty to work individually, too, in order to make my eagerness visible and the desire to serve the King and the public; this is why I composed two memoirs, one containing the abuses that were being committed in the Commerce, which I presented to Monseigneur Colbert at the end of August, 1670, the other was a bill of Regulation, which I composed in several chapters, where I proposed dispositions that I saw as just and proper to put a limit all the abuses I mentioned in the first memoire; I presented this bill to Monseigneur Colbert in the following September’.
Right, I am back into hermeneutics. Have you noticed, how long are the sentences in Master Savary’s writing? That was the style of the time, I guess. It survived until the first half of the 19th century, when shorter sentences became definitely the fashion. Did those people, back in the days, have longer breath? Were they able to put more sound between two full stops? Or, maybe, they just have longer and more structured ideas, which they did not feel like truncating? Who knows, they are no longer here to tell us. Anyway, it appears that Master Savary was not really the perfect merchant he wrote about. He had some adventure in the Negoce, but, on the whole, he did not seem to like it. He was more of a bystander to business, who used to have views on business. He was an economist, just as I am. When I was young, I had serious plans for a legal career. In 1989, in Poland, the Big Swing came, everything fell apart, there was not much I could inherit, and so I went into business just in order to survive in the new reality. Doing business was interesting, only I just wasn’t prepared for it, and after fourteen years I decided, just as Master Savary did, to accept a job from a really calm duke. In my case it was a university. Comes the time, comes the calm duke.
Master Savary was an economist, only he did not know he was. The word ‘economist’ comes from the French ‘économiste’, and this was the label put on the followers of Francois Quesnay, the author of ‘The Economic Table’ (French: ‘Tableau économique’), published in 1758, a few years before Adam Smith published his ‘Enquiry Into The Nature and Causes of The Wealth of Nations’. The work by Francois Quesnay was probably among the first piece of macroeconomics officially published, together with ‘The Theory of Taxation’ (French: ‘La Théorie de l’Impôt’) by Marquis de Mirabeau. Initially, the term ‘économiste’ was a bit pejorative and meant some loonies obsessed with numbers. Economics, at the time, the time being the verge of the 18th and the 19th centuries, were ‘political economy’. It was only at the end of the 19th century that any scholar could call himself seriously an economist.
I am an economist, which, due to the work of intellectual titans of the past, is no more equivalent to being a looney obsessed with numbers. Science can help, and this is why I do science.
I am consistently delivering good, almost new science to my readers, and love doing it, and I am working on crowdfunding this activity of mine. As we talk business plans, I remind you that you can download, from the library of my blog, the business plan I prepared for my semi-scientific project Befund (and you can access the French version as well). You can also get a free e-copy of my book ‘Capitalism and Political Power’ You can support my research by donating directly, any amount you consider appropriate, to my PayPal account. You can also consider going to my Patreon page and become my patron. If you decide so, I will be grateful for suggesting me two things that Patreon suggests me to suggest you. Firstly, what kind of reward would you expect in exchange of supporting me? Secondly, what kind of phases would you like to see in the development of my research, and of the corresponding educational tools?
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 Selten, Reinhard. “Reexamination of the perfectness concept for equilibrium points in extensive games.” International journal of game theory 4.1 (1975): 25-55.
 Hammerstein, Peter, and Reinhard Selten. “Game theory and evolutionary biology.” Handbook of game theory with economic applications 2 (1994): 929-993.
 Sombart, W., 1911-2001, The Jews and Modern Capitalism, translated by M.Epstein, First published 1911, edition 2001 published by Batoche Books Limtied
Educational: International Economic Transactions, Analysis of the GATT 1994
In this update, I am mostly addressing my Graduate Master’s students in their curriculum entitled ‘International Economic Transactions’. Still, I will be delighted to provide meaningful insight to any of my readers. We take on analysing the GATT 1994. It is on purpose that I am not starting with GATT 1947. That mother-treaty of the World Trade Organization was signed in very special circumstances, when the Western world was shaking off after World War II. The political and economic climate was somehow unique. The GATT 1994 is much closer to the present reality, and the road covered between its signature and that of the Trade Facilitation Agreement (2013 – 2017) is easier to trace than if we were starting in 1947. And so we start with GATT 1994. I am starting with decrypting the acronym: GATT means ‘General Agreement on Tariffs and Trade’. Nothing to write home about, basically, and still one thing is interesting. If there is a general agreement, it logically implies the existence of specific agreements. This is very much the reality of international trade: wherever you look, you see complicated, multi-level, intricate structures made of bilateral agreements, multilateral ones, letters of understanding, memoranda and whatnot (e.g. protocols).
If now, you care to read GATT 1994, there is not much reading to do, indeed: it is just two pages. It is a strange logical structure. On those two pages, you have just two sections. Section 1 says what specific documents does the GATT 1994 cover, and section 2 provides ‘Explanatory Notes’. The questions pops up: why the hell should anyone put any effort in negotiating that looks like two pages of minutes from a management meeting? As you read through section 1, you notice that the member countries of the World Trade Organization (WTO) have hatched quite a lot of various documents concerning trade, between 1947 (some of them even before the entry into force of the GATT 1947) and 1994. The most cryptic category is to be found under section 1(a)(iv), namely ‘Other decisions of the Contracting Parties’. Thus, many governments had had signed the GATT 1947, and then they had been doing things that stretched the original agreement in so dire a way that a new agreement had to be signed, recognizing the legal validity of those things that governments had been doing.
This is a good moment to exemplify the relation between an international agreement pertaining to trade, and its economic context. The GATT 1947 had been signed with a general purpose of avoiding so-called ‘trade wars’, i.e. a spiral of aggressive pro-export policies in individual countries, when a government deliberately depreciates its own currency in order to make its exported goods more price-competitive in foreign markets. Thus, the GATT 1947 had been originally combined with an international financial architecture, where the currencies of major economies had been tied nominally to the price of gold, and de facto to the price of the US dollar. On the other hand, the general principle of free trade, in GATT 1947, was strongly supported by economic sciences, either on the grounds of the so-called Ricardian paradigm – countries benefit from free trade by the development of their most competitive categories of businesses – as well as based on the the Heckscher – Ohlin model , which, in turn, stated that free trade compensates the negative effects of the otherwise imperfect geographical distribution of production factors. Still, since 1947, things kept happening, and they did so in a way which very much contradicted the fundamental principles of free trade. The biggest economies in the world, led by the biggest of the biggest, the United States of America, kept enforcing protectionist policies regarding trade. The clause of domestic components has been really the fashion since 1947. It says that you can import any goods inside a given country, but if you do not include in those goods a given percentage of components made domestically in this country, you pay additional tariffs, or, for example, your goods are excluded from public procurement (i.e. the government cannot buy them). In the 1970ies, most economies started departing from the gold standard, and even the United States detached their dollar from the price of the gold. As the system of tied monetary exchange rates faded progressively, the idea of free trade supporting said system became obsolete as well. New economic research showed that whilst the Ricardian paradigm, and the Heckscher – Ohlin one generally hold, other forces are at work, which can actually increase economic inequalities . The idea of aggressive depreciation in domestic currencies returned, with the energetic showing around from the part of Asian economies (Japan, China etc.), and with the governments of developed countries rediscovering an old truth that manipulating their own currencies could help in alleviating the burden of public debt. Regional zones of free trade, like the European communities or the ASEAN in the Asia and Pacific region, made the provisions of GATT 1947 look a bit pale. All in all, by the beginning of the 1990ies, it became obvious that the GATT 1947 has to be changed somehow, only in the meantime, i.e. since 1947, a whole bureaucratic structure had emerged under the label of World Trade Organization, and this structure was not keen to give up their position. It is funny how an otherwise quite substantial bureaucratic structure can call for ‘minimizing bureaucracy in trade’.
Now, here is the first big lesson in understanding international economic transactions. When countries transact ‘economically’, it means they do so in a way that affects whole economic orders. In fact, countries do not transact at this level: governments do. In international economic exchanges, there is a business level, and a government level. The latter expresses itself in policies, and some of these policies find an expression in international agreements and treaties. Second lesson: those international agreements and treaties are usually at least one step behind the business level of economic exchange. When governments claim they ‘signed a forward looking agreement’, it is to be understood as ‘we sincerely hope that no bloody business people will think about something new and unexpected, which would force us to renegotiate this document’. Trade has been going on for millennia, and it will keep going on. When governments claim they ‘stimulate’ trade with their policies, it means that at best they don’t get in the way.
The third lesson in more complex: if you want to understand how a given regulation works, trade agreements included, try and build various antithetic alternatives for it, i.e. regulations built with provisions logically opposing those actually studied ones. Section 1 of the GATT 1994 starts with a general provision that “The General Agreement on Tariffs and Trade 1994 (“GATT 1994”) shall consist of: […]’, and the […] takes the remaining of the A4 first page of the document, listing all those things that governments had done since 1947. Imagine an agreement starting with “This agreement SHALL NOT consist of […]’, with the […] being rigorously the same as in the original. The first option means that the agreement being signed explicitly incorporates all those past, particular polices. It is usually practiced when the agreement being signed has to deal with, and de facto recognize, deep disagreement between the contracting parties. This is the type of agreement we sign just in order to give some flesh to further negotiations that we know inevitable. The second, antithetic a version means a sharp divide: we do not recognize the validity of those policies. It is being used when a real agreement has been reached, and the new regulations can safely supplant the old ones.
Thus, when a new agreement is being signed in the place of an old one, two big strategies can be followed: the new one can build on the predecessor, or it can completely supplant it. The GATT 1994 is an example of the former, but, for example, consecutive treaties of the European Union bend more towards the latter.