Chitchatting about kings, wars and medical ventilators: project tutorial in Finance

My editorial on You Tube

I continue with educational stuff, so as to help my students with their graduation projects. This time, I take on finance, and on the projects that my students are to prepare in the curriculum of ‘Foundations of Finance’. The general substance of those projects consists in designing a financial instrument. I know that many students struggle already at the stage of reading that sentence with understanding: they don’t really grasp the concept of designing a financial instrument. Thus, I want to sort of briefly retake it from the beginning.

The first step in this cursory revision is to explain what I mean by ‘financial instrument’. Within the framework of that basic course of finance, I want my students to develop intellectual distinction between 5 essential types of financial instruments: equity-based securities, debt-based securities, bank-based currencies, virtual currencies (inclusive of cryptocurrencies), and insurance contracts. I am going to (re)explain the meaning of those terms. I focus on those basic types because they are what we, humans, simply do, and have been doing for centuries. Those types of financial instruments have been present in our culture for a long time, and, according to my own scientific views, they manifest collective intelligence in human societies: they are standardized parcels of information, able to provoke certain types of behaviour in some categories of recipients. In other words, those financial instruments work similarly to a hormone. Someone drops them in the middle of the (social) ocean. Someone else, completely unknown and unrelated picks them up, and their content changes the acquirer’s behaviour. 

When we talk about securities, both equity-based and debt-based, the general idea is that of securing claims, and then making those secured claims tradable. Look up the general definition of security, e.g. on Investopedia. If you want, in your project, to design a security, the starting point is to define the assets it gives claim on. Equity-based securities give direct, unconditional claims on the assets held by a business (or by any other type of social entity incorporated in a business-like way, with an explicit balance sheet), as well as conditional, indirect claims on the dividend paid out of future net income generated with those assets. Debt-based securities give direct, unconditional claim on the future cash flows, generated by the assets of the given business. The basic idea of tradable securities is that all those types of claims come with a risk, and the providers of capital can reduce their overall risk by slicing the capital they give into small tradable portions, each accompanied by a small portion of adjacent risk. Partitioning big risks and big claims into small parcels is the first mechanism of reducing risk. The possibility to trade those small parcels freely, i.e. to buy them, hold them for however long pleases, and then sell them, is the second risk-reducing device.

The entire concept of securities aims, precisely, at reducing financial risks connected to investing big amounts of capital into business structures, and thus at making that investment more attractive and easier. Historically, it literally has been working like that. Over centuries, whenever people with money were somehow reluctant to connect with people having bold ideas, securities usually solved the problem. You were a rich merchant, like in the 17th century-France, and your king asked you to lend him money for the next war he wanted to fight. You would answer: ‘Of course, my Lord, I would gladly provide you with the necessary financial means, yet I have a tiny little doubt. What if you lose that war, my Lord? Who’s going to pay me back?’. Such an answer could lead into two separate avenues: decapitation or securitization of debt. The former was somehow less interesting financially, but the latter was a real solution: you lend to the King, in exchange he hands you his royal bonds (debt-based securities), and you can further sell those bonds to whoever is interested in betting on the results of war.      

Thus, start with a simple business concept, e.g. something of current interest, such as a factory of medical ventilators. You have a capital base, i.e. some assets, and you finance them with equity and liabilities. Classical. You can skip the business planning part by going to the investors relations site of any company you know, taking their last financial report and simply simulating a situation when those guys want to increase their capital base, i.e. add to their assets. I mentioned medical ventilators, so you could go and check Medtronic’s investors relations site (http://investorrelations.medtronic.com/ ), and pick their latest quarterly financials. They have assets worth $92 822 mln, financed with $51 953 mln in equity and $40 869 in debt. Imagine they see big business looming on the horizon, and they want to accumulate $10 000 mln more in assets. They can do it either through additional borrowing, or through the issuance of new shares in the stock market.

You can go through the reports of Medtronic as well as through their corporate governance rules, and start by taking your own stance at the basic question: if Medtronic intends to accrue their assets by $10 000 mln, would you advise them to collect that capital by equity, or by debt, or maybe to split it somehow between the two. Try to justify your answer in a meaningful way.

If you go for equity-based securities (shares in equity), keep asking questions such as: what should be the nominal value (AKA face value) of those shares? How does it compare with the nominal value of shares already outstanding with this company? What dividend can shareholders expect, based on past experience? How are those new shares expected to behave in the stock market, once again based on the past experience?

If your choice is to bring capital through the issuance of debt-based securities, go for answering the following: what should be the interest rate on those corporate bonds? What should be their maturity time (i.e. for how long should they stay in the market of debt before Medtronic buys them back)? Should they be convertible into something else, like in the shares in equity, or in some next generation of bonds? Once again, try to answer those questions as if I were just a moderately educated hominid, i.e. as if I needed to have things explained simply, step by step.

See? Chitchatting, talking about kings, wars and medical ventilators, we have already covered the basics of preparing a project on equity-based securities, as well as on the debt-based ones.

If you want to go somehow further down those two avenues, you can check two of my blog updates from the last academic year: Finding the right spot in that flow: educational about equity-based securities , and  Unconditional claim, remember? Educational about debt-based securities.

Now, we talk about money, i.e. about a hypothetical situation when my students design a new currency in the framework of their project. Money is strange, to the extent that technically it should not have any intrinsic value of itself, as a pure means of exchange, and yet any currency can be deemed mature and established once its users start hoarding it a little bit, thus when they start associating with it some sort of intrinsic value. Presently, with the development of cryptocurrencies, we distinguish them from bank-based or central-unit-based currencies. In what follows immediately, I am focusing on the latter category, before passing to the former.

So, what is a bank-based currency, AKA central-unit-based currency? A financial institution, e.g. a bank, issues a certain number of monetary units (AKA monetary titles), which are basically used just as a means of exchange. The bank guarantees the nominal value of that currency, which, in itself, does not embody any claim on anything. This is an important difference between money and securities: securities secure claims, money doesn’t. Money just assures liquidity, understood as the capacity to enter into exchange transactions.   

When designing a new currency, step #1 consists in identifying a market with liquidity problems, e.g. we have 5 developing countries, which do business with each other: they trade goods and services, business entities from each of those countries invest in the remaining four etc. Those 5 countries have closed or semi-closed monetary systems, i.e. their national currencies either are not exchangeable at all against any other currency, or there are severe limitations on such exchange (e.g. you need a special authorization from some government agency). Why do those countries have closed monetary systems? Because their governments are afraid that if they make it open, thus when they allow free exchange against foreign currencies, the actual exchange rate will be so volatile, and so prone to speculative attacks (yes, there are bloody big sharks in those international financial waters) that the domestic financial system will be direly destabilized. Why any national currency should be so drastically volatile? It happens when this currency is not really exchanged a lot against other currencies, i.e. when exchange is sort of occasional and happens in really big bundles. There is not enough accumulated transactional experience. Long story short, we have national currencies which are closed because of the possible volatility and are so prone to volatility because they are closed systems. Yes, I know it sounds stupid. Yet, once you see that mechanism at work, you immediately understand. In the communist Poland, we had a closed monetary system, with our national currency, the zloty, technically being not exchangeable at all against anything else. As a result, whenever such exchange actually took place, e.g. against the US dollar, you needed to be a wizard, or a prime minister, to predict more or less accurately the applicable exchange rate.

Those 5 countries have two options. For one, they can use a third-country, strong currency as a local means of exchange, i.e. their governments, and their national business entities can agree that whenever they do business transnationally, they use a reference currency to settle their mutual obligations. The second option consists in creating an international currency, specifically designed for settling business accounts between those countries. This is how the ECU, the grandpa of the euro, was born, back in the day. The ECU was a business currency – you couldn’t have it in your wallet, you just could settle your international accounts with it – and then, as banks got used to it, the ECU progressively morphed into the euro. What you need for such a currency is a financial institution, or a contractually established network thereof, who guarantee the nominal value of that business currency.

If our 5 countries go for the second option, the financial institution(s) who step in as guarantors if the newly established currency need to bring to the table something more than just mutual trust. They need to assign, in their balance sheets, specific financial assets which back the aggregate nominal value of the new currency put in circulation. Those assets can consist of, for example, a reserve basket of other currencies. Once again, it sounds crazy, i.e. money being guaranteed with money, but this is how it works.

Therefore, step #2 in designing a new, bank-based currency, requires giving some aggregate numbers. What is the aggregate value of transactions served by the new currency? Let’s go, just as an example, for $100 billion a year. How long will each unit of the new currency spend on an individual bank account? In a perfectly liquid market, each unit of currency is used as soon as it has been received, thus it just has one night to sleep on a bank account, and back to work, bro’. In such a situation, that average time on one account is 1 day. Therefore, in order to cover $100 billion in transactions, we need [$100 / 365 days in the year] = $0,2739726 billion = $274 million in currency. If people tend to build speculative positions in that currency, i.e. they tend to save some of it for later, the average time spent on an individual account by the average unit of that new money could stretch up to 2 weeks = 14 days. In such case, the amount of currency we need to finance $100 billion in transactions is calculated as [$100 / (365/14)] = [$100 * 14 / 365] = $3,8356 billion.

There is a catch. I talk about introducing a new currency, but I keep denominating in US dollars, whence the next question and the next step, step #3, in a project devoted to this topic. The real economic value of our money depends on what we do with that money, and not really on what we call it. One of the things we do with an international currency is to exchange it against national currencies. In this case, we are talking about 5 essentially closed national currencies. For the sake of convenience, let’s call them: Ducat A, Ducat B, Ducat C, Ducat D, and Ducat E. Once again for sheer convenience we label the new currency ‘Wanderer’. So far, our 5 countries have been using the US dollar for international settlements, whence my calculations denominated therein. The issue of exchange rate of the Wanderer against the US dollar, as well as against our 5 national Ducats, is a behavioural one. Yes, behavioural: it is about human behaviour.

We have businesspeople doing international business in USD, and we want to convince them to switch to the Wanderer. What arguments can we use? There are two: exchange rate per se, and exchange rate risk. Whoever is a national of our 5 countries, needs to exchange their national Ducat against the US dollar and the other way around. As neither of the Ducats is freely convertible, exchange with the dollar takes place, most probably, in the form of big, bulk transactions, like once a month, mediated by the central banks of our 5 countries. Those bulk transactions yield an average exchange rate, and an average variance around that average.

We want to put in place an alternative scheme, where the national Ducats (A, B, C, D, E) are exchanged in real time against the Wanderer, and then the Wanderer gets exchanged against the US dollar. The purpose is to make the exchange {Ducat Wanderer USD} more attractive, average-rate-wise or variance-in-rate-wise, than the incumbent {Ducat Individual, National Central Bank USD} one. Some of you might think it is not realistically possible, yet it really is. If 5 central banks of developing countries gang up together to buy and sell US dollars, they can probably achieve a better price, and less volatile a price, as compared to what each of them separately could have. There is even an additional trick, and this is like really a trick: central banks of our 5 countries could hold some of their financial reserves in US dollars, more specifically the part devoted to backing the Wanderer. That’s the trick that our central bank in Poland, the National Central Bank of Poland, uses all the time. We are in the European Union, but we do not belong to the European Monetary Union, and yet we do a lot of business with partners in the eurozone. The National Bank of Poland holds important financial reserves in euros, and thus gives itself a better grip on the exchange rate between the Polish zloty and the euro.

Summing up the case of graduation projects focused on designing a new bank-based currency, here are, rephrased once again, the basic logical steps. Start with identifying a market with liquidity problems, such as closed monetary systems or very volatile national currencies. This is usually an international market made of developing countries. Imagine a situation, when the central banks of the countries in question place some of their financial reserves in a strong currency, e.g. the US dollar, or the Euro, and then the same central banks introduce a currency for international settlements in that closed group of countries. Keep in mind that the whole group of countries will need an amount of currency calculated as: [Aggregate value of international transactions done in a year * [Average number of days that one user holds one unit of currency / 365].  

The whole scheme consists, at the end of the day, in obtaining a better and less volatile exchange rate of individual national currencies against the BIG ONES (e.g. the US dollar) through aggregating their exchange transactions in the financial market.       

That would be all in this tutorial. I have covered three types of financial instruments that my students can possibly design for their graduation: equity-based securities, debt-based securities, and bank-based currencies. In the coming weeks I will try to write something smart on designing cryptocurrencies and insurance contracts. Till then, you can additionally read entry March, 26th, 2019 – More and more money just in case. Educational about money and monetary systems – and entry March 31st, 2019 – The painful occurrence of sometimes. Educational about insurance and financial risk.

Cut some slack. Project tutorial for International Management at the Frycz University.

My editorial on You Tube

I am focusing, for a few days starting from today, on delivering educational content. In the framework of 4 courses I teach, this semester, at the Andrzej Frycz Modrzewski Krakow University, three – Foundations of Finance, International Management, and International Trade – require preparing graduation projects. I am presenting guidelines for those projects, and I start with the way I advise for preparing a project in International Management, Summer-Spring 2020.

When my students prepare a project in management, I keep repeating the truth: neither I, the teacher, nor you, my students, are professional managers. We are looking at the world of management from outside. This is a harsh truth to swallow: I teach something I have almost no practical experience with. What kind of skills can I, the teacher, bring to the table, in such case? I have skills in patterning and modelling social structures. That could be the reason why I do social sciences, and this is the bacon I can feed my students in any kind of management course. Thus, when you do management with me, in class, we are all throwing our limited knowledge at real situations and try to understand our own cognitive limitations. From that angle, the course of management aims at learning how much you don’t know, and what you need to learn about the situations we are talking about.   

In the course of International Management, the general frame for your graduation projects is to figure out an organisational solution to problems, which manifest themselves as officially acknowledged risk factors, explicitly discussed in annual reports of the companies, whose cases we discuss in class. That general approach unfolds in a few distinct steps. You read the annual report of, for example, General Electric, which you have already worked with in the first online class this semester. You take any risk factor named in that report. That risk factor means that something specific can happen, which will harm GE’s business. What exactly is that specific, adverse event? Try to imagine very realistically what kind of real situation can it be. When you do that, you will probably figure out 4 types of situations.

Firstly, someone recurrently makes small mistakes, over and over again. Those small mistakes pile up, and they sort of capitalize on each other. If today I neglect checking something important, tomorrow that negligence is likely to bring some adverse effects, and when I repeat it, i.e. when I skip that important check once again, adverse effects combine. When I neglect to check, whether the salary system for salespeople in my business is working well, those people get more and more pissed every month. Their frustration accumulates, and they react more and more nervously to even small imperfections in the wage system.

Secondly, someone can make one, big, catastrophic mistake, e.g. signing a big, really bad contract, which, in turn, will expose our business to a whole series of adverse outcomes, or, for example, a person will take revenge on the top management by transmitting the details of some in-house technology to a competitor. Please, note that mistakes can fluidly transform, or coexist with opportunistic behaviour. What is seen as a mistake from outside can be the manifestation of wrongful intentions on the part of the person who makes that mistake.

A big, catastrophic event can take place as ‘force majeure’, e.g. a hurricane, or a pandemic such as the present COVID-19 one, and this is the third type of risk factor. Finally, the external structure of our market can change in an unfavourable direction, and this usually takes place on an adverse change in prices, e.g. the present slump in the prices of crude oil, which is a good thing for some businesses, and a very bad one for others. That fourth type of risk is usually called ‘financial risk’.

Thus, whatever bad happens to a business, the roots of that adverse event usually fall into one of those four categories: repeated, small human mistakes, occasional big mistake, external disaster, or unfavourable external change in the prices of something. Now, think how you can make an organisation resilient to those risks. What kind of people would you need, in order to shield the business against those risks? What kind of jobs should those people do? How can you pay them? What kind of internal control you need? What kind of organisational structure will work better, in terms of resilience? Do you need, for a given business, a solid, relatively slow functional structure with a lot of internal controls, exhaustive documentation etc., or, maybe, what you need is an agile, very horizontal structure, with task-teams focused on projects rather than functional divisions with distinct competences? Which organisational pattern which shield you better against small, bitchy mistakes or frauds? Which is going to play out better when it comes to preventing a disaster-like bad decision?

In that case of General Electric, I asked my students to study the risk of making bad investments or unfavourable dispositions (reminder: disposition, in this context, means selling and entire business or an important portion of strategic assets from a business), thus the risk named as ‘Portfolio strategy execution’. We focused on the healthcare segment of GE’s business (i.e. technologies for healthcare and biotech), and I gave my students (it was in the beginning of March) a task which looks prophetic now. I asked them to imagine that GE wants to sell (i.e. divest from) the entire healthcare segment of their business. Right now, hardly anyone in their right mind would get rid of technological assets in healthcare. Still, in the beginning of march, the s**t we currently have was just outlining itself.

Anyway, we focus on the healthcare segment in the general portfolio of General Electric. In the discussion of ‘Portfolio strategy execution’, in the GE’s annual report for 2019, you can read the following passage: “Our success depends on achieving our strategic and financial objectives, including through dispositions. We are pursuing a variety of dispositions, including the planned sale of our BioPharma business within our Healthcare segment and exiting our remaining equity ownership position in Baker Hughes. The proceeds that we expect to receive from such actions are an important source of cash flow for the Company as part of our strategic and financial planning”. Let’s break it down into adverse events, and then I can take a risk (!) at trying to lead my students from risk factors to organisational solutions that can shield against those risks.

The first sentence of that passage says: “Our success depends on achieving our strategic and financial objectives, including through dispositions”. It roughly means that the top management of GE sees the entire portfolio of businesses, all segments combined, as a hand of cards in a poker game. You probably know that in poker you can ask the croupier to exchange one or more of the cards from your hand against cards from the deck. When you go for such an exchange, you expect that the cards you get from the croupier will make a better match to the remaining ones, which you still keep in hand. You are a top manager with GE, and you decide to sell (i.e. to dispose of) an entire business, in order to generate a cash inflow, which, in turn, will serve you to buy (i.e. invest in) another entire business.

Your basic challenge in such a situation is limited, imperfect information. You know, how the business you intend to sell is playing out with all the rest in your hand, and you have some expectations as for how another business – which you intend to buy – could work with the same rest in your hand. From the cognitive point of view, you are trading actual, hard-facts-based knowledge of a presently owned business, against much foggier expectations as for future possible gains from another business. You are exchanging some known s**t against some unknown s**t, with the unknown being somehow tempting you with potentially higher rewards.

Let’s translate this situation into the four basic types of risk: repeated, small human mistakes, occasional big mistake, external disaster, or unfavourable external change in the prices of something. Someone, further down the corporate hierarchy, could have been making small recurrent mistakes, or could have been perpetrating small recurrent frauds, which could have brought the healthcare business you intend to dispose of to a situation of suboptimal performance. You think the business you want to sell is worth X $ million in terms of expected net income, but in fact it could bring much more, like 2*X $ million, if you eliminate the risk factor of recurrent, small human mistakes. How can an organization shield itself against this type of risk? The most obvious answer is that if you currently control, in a rational way, operational performance in the given business, you can have a pretty good idea of what that business is capable of. If you don’t have such a controlling system, you could be selling a business with a lot of potential, and you would be selling because you cannot see that potential.

Conclusion #1: if you have in place a rational system of KPIs (Key Performance Indicators), in each business you have in your portfolio, you can make much more informed decisions as for selling (disposing of) each such business. Topic #1, which my students can develop in their projects, and which arises from that partial conclusion, could go as follows: ‘Study the entire portfolio of businesses in General Electric. Look for any piece of information you can find about it. How can you know that each of those businesses is currently working at 100%? What system of performance measurement you would like to see in place, so as to be well informed? At the end of the day, what information would you need to be sure that the decision of selling a business is really well-founded?

Let’s move further. The next sentence, in the same passage says: ‘We are pursuing a variety of dispositions, including the planned sale of our BioPharma business within our Healthcare segment and exiting our remaining equity ownership position in Baker Hughes’. A variety of dispositions means that GE is selling, or, potentially, can be selling at any given moment, many businesses at once. You can lose your balance in the midst of variety. You can do something relatively well, at the expense of doing something else much less efficiently that what you expect from yourself. Let’s try to find ways of preventing it.

When you perform many similar actions in parallel, you would like to carry out each of those actions with a maximum of efficiency. You study, you practice some sport, and you engage in business, and you would like to deliver your A game in each of these fields. There are some basic techniques you can use to assess whether you can find efficient balance at all, and whether your actions are balanced at a given moment. One of those techniques consist in assessing your resources. If, pursuing that existential example, you study, you do sport and you do business, a basic personal resource is time and human energy (i.e. the chemical energy you need in order to generate neurotransmitters, which, in turn, your nervous system needs to have all the major angles covered). Question: do you have enough time to cover studies, sport and business? It is a harsh question. The answer might be no, I haven’t. The even harsher implication of that answer is the necessity to cut something out. I focus on exams, and I give up my performance in an important sports event, or I focus on business and take a sabbatical at the university. Another answer could be yes, I have enough time, but I need to cut some slack. I need to give up on some pleasures (e.g. watching Netflix, or partying), and that will give me 2 extra hours a day for packing all my priorities in it.      

We can translate it back into the context of General Electric. When ‘We are pursuing a variety of dispositions’, we can ask: ‘Do we have enough organisational resources to pursue that entire variety of dispositions efficiently? Do we have enough people, enough computational power in our digital systems, enough good relations (or good enough relations!) with external entities so as to handle all that variety as it is?’. The answer can be yes, we have, or no, we haven’t. In the former case, the immediately following question is: ‘Do we have those resources organized optimally? Does every person involved know what they are supposed to do? Etc.’. In the latter situation, when we conclude that we cannot possibly cover all the angles with the resources we have, we follow up by asking ourselves: ‘What do we do? Do we hire additional human resources, or/and engage additional technology into the process of managing as wide a variety of dispositions as we are currently handling, or, maybe, it is a better idea to reduce variety? Maybe we can postpone some of those dispositions and focus more efficiently on the remaining deals? Does it all have to be carried out right now? Maybe we can make a timeline over the 2 years to come?’. By the way, in unstable market conditions, such as every business is facing now, with the COVID-19 pandemic and its consequences, it might pay off to slow down our decision-making, to observe and learn more before taking strategic decisions.

Conclusion #2: in a given context of external market conditions, the organization we actually have in place has a given capacity to process information and to make strategic change on the grounds of that information. If we want to pursue more operations in parallel than our organizational resources actually allow to, we risk losing our bearings in the midst of variety. There are two alternative ways out of that predicament. On the one hand, we can cut on the variety of our operations and/or our strategic decisions so as to focus on the amount we can really handle. On the other hand, we can expand our organizational resources so as to pursue efficiently the entire variety of actions that presents itself to us.

Thus, a possible topic #2 emerges for my students in International Management. Once again, go over the business of General Electric. Try to understand very practically, what do they mean by ‘pursuing a variety of dispositions’. Variety means what exactly? Now, what organizational resources (people, information, business relations etc.) does GE need so as to carry out efficiently one single disposition? Expand by assuming that you run an investment fund, with participations in many high-tech businesses. Every few months, you need to decide whether each of those businesses is worth holding in your portfolio, or maybe it would be better to sell it. What organizational resources do you need to manage such decisions efficiently? How many people would you need to hire, in such an investment fund? What kind of duties would those people have to carry out, and what skillset you would expect in them?               

Aware of how we generalize

 

I wonder whether I can develop sort of a general pattern on the basis of the case studies I presented in my recent updates: « Let’s Netflix a bit », « Brique par brique », and « Dans la tête d’un non-éléphant ». I mean, what I can do, as a social scientist, in a cognitive sequence that starts with finding the key metrics for the situation, in order to discover anything, then unfolds into finding the sources of information on the actual values of those metrics, just to use that information to identify the key resources, the core processes, and the fundamental ethical values of the social pattern studied.

Key metrics are observable, empirical variables, which I can use to assess the situation in a social context. Finding those key metrics and nailing down their actual values is the essence of what can be deemed as ‘economic method’. This is very largely the essential discovery that Adam Smith made: social systems can be observed mathematically, as sets of equations. Thus, the first step in that method I am unfolding in front of myself, and in front of you, my readers, is to find the key numbers in my social environment. How many people are there in my immediate social circle? With how many of them I should interact daily in order to build for myself a position in the local hierarchy?

Yes, I know, it sounds a bit artificial. People don’t intuitively think like this. I know I intuitively don’t think like this. First conclusion: this method I am unfolding is largely made into formalized research, not really the first cognitive reflex in a new social situation. I think that the other branch of the same path, which I have just published in French, in that update entitled « Dans la tête d’un non-éléphant », is a bit more intuitive. It spells: find the key rules of conduct in your social environment, try to nail down their alternative formulations, and find the meta-rules that serve to select the actual rules of conduct among all the available alternatives. In other words, figure out the game which is being played, get the hang of its rules, and then you have better grounds for enquiring about the numbers.

Good, let’s practice. I start exercising with the topic of my current research: renewable energies and my EneFin concept, that quasi-cooperative scheme where small consumers of energy buy, in the form of complex contracts, both energy and capital shares in the local suppliers of that energy. See, for example, that update entitled ‘The Tribal Equilibrium of the Joule’, in order to have a relatively fresh idea of that concept. When I step, as a newcomer, into any local market of energy, how can I identify the basic rules of the game that is being played in the whereabouts?

As it regards energy, the basic game is about how much energy do I need to occupy a given place in the local social hierarchy, and how much do I have to pay for that amount of energy? As you can notice, I do not really care, as a social Robinson Crusoe, about the natural environment. Yes, it sounds and looks primitive and short-sighted. Still, as I am trying to deconstruct honestly the course of social discovery, this is what I observe in my own thinking as for the market of energy: reference to natural environment and its well-being comes only secondarily, after I have put in place my essential bearings in the social reality strictly spoken.

Anyway, in this particular case – the market of energy – the rules of the game I am playing are very much quantitative. They are prices and quantities, essentially, but not exclusively. The contracts habitually practiced in that market come immediately after, or even ex aequo with prices and quantities. Contracts give an idea of the market power that individual market players can really deploy when negotiating the modalities of their mutual transactions.

If I had to present this path of discovery in a teachable form, like ‘Getting to know a local market of energy, in five easy steps’, what would it look like? Lesson #1 would probably start with a general advice: take some statistics about the local market of energy, for example from the website of the International Energy Agency, or from the World Bank, and check how much energy you are likely to consume per your own capita. Yes, that data is in kilograms of oil equivalent or in tons thereof, and your energy bill will be most likely in kilowatt hours, and thus it is useful to remember: 1 kg of oil equivalent = 11,63 kWh. Try to think, how much energy, above the strictly personal use, does a person need, in this particular market, when they want to start a small business, or when they want to turn from an individual into an organisation?

Lesson #2: get to know the prices of energy in your local market. Is there any reliable source of information in this respect, or do you have to sign, first, a contract with the local supplier of energy, and buy some, and receive a bill, in order to know the actual price? The transparency of pricing is an important institutional trait in energy markets, especially as it comes to the relative market power in small users, like households or really small businesses. As – or if – you become informed about the prices of energy, you can calculate the typical budget spent on energy, or simply the average annual energy bill, in typical social actors.

Lesson #3: get to know the typical contracts, in that local market of energy. First of all, is there any source of information about the contents of a typical contract for the supply of energy, or, as it is sometimes, and sadly, the case for the prices of energy, do you have to sign the contract first, and only then you are entitled to receive all those appendixes in small print, which fully explain what you have just signed? Yes, I know some of you can laugh, at this point, but I remember signing my first contract for the supply of electricity, for my first fully owned apartment in Poland, back in 1992. I had to sign a summary form, which essentially stated that I agree to the terms which will be delivered to me in written form once I sign that particular form. Kafka, you say? Yes, happens sometimes.

Anyway, in that lesson #3, the interesting path to follow in your own discovery is to observe the diversity of contracts. I am connecting, here, to my last update in French, entitled « Dans la tête d’un non-éléphant ». In this particular phase of research, it is interesting to discover how many different and clearly distinct contractual patterns are there in the given local market. Is it a ‘mono-contract’ environment, or is there some flexibility? The former suggests a typical market structure from textbooks on microeconomics: monopoly or oligopoly. The latter suggests something more competitive.

Basically, lessons #1 – #3 should tell us what room for institutional innovation is there in this precise market, i.e. what are the odds that a new institutional scheme will work and gain participants.

Good, lesson #4. Once we know the quantities, the prices, and the contracts, it is time to try something practical: a business concept. Not even a fully blown business plan, just a business concept. As you see that local market, can you think of a new, promising business? Logically, what you supply in the market of energy is, well, energy. There is not much room for product innovation in that respect. Still, as you think of it, what we consciously purchase is not the strictly spoken energy, as we do not decide about each individual electron flowing through the plug, but rather the access to energy. You can think about many different forms of that access.

A quick idea, just like that. Imagine a city with many, publicly available charging points for electronic devices. At some of them you can pedal to generate electricity, but just at some. Imagine that you have something like a unique login ID, or codename, which you use to plug your electronics into those publicly available sockets. Every time you use that form of energy outside your household (or the headquarters of your company), the corresponding intake of kilowatt hours charges your account. That would be a market of energy, where consumption is as individualized as technologically possible.

In that lesson #4, you can play with assessing this business concept. What are the odds that it catches on anywhere on Earth? What is the SWOT map, i.e. what are the required competitive strengths, the weaknesses to avoid, as well as opportunities and threats generated by the market?

I have that intuition that you reach the summit of scientific understanding about anything when you can design and control an experiment pertaining to that anything. This is the path to follow in your lesson #5 about the market of energy. Design and control an experiment, related or unrelated to the business concept from lesson #4. How can people experiment with energy? What types of behaviour are important to observe experimentally? How can you achieve, in your experimental environment, the usual attributes of a good experiment: isolation of precise phenomena, acceleration of their occurrence (as compared to real life), observability?

Why do I put experimentation in the last lesson? This is an old principle known to all engineers: if you can experiment with something, and survive, and have some fun, and, on the top of all that, have some new knowledge, it means you’ve got the hang of the thing.

I am taking on another particular, the teaching of management, a teaching I deliver to the 1st year Undergraduate students. If, hypothetically, I try to manage any type of organisational structure, from any hierarchical position that allows any management whatsoever, what are my first steps into an unknown territory? How can I know the rules of the game and which rules are a priority to figure out? Intuitively, I would look for the things that hold the surrounding organisation together. Are those people working together, although, let’s face it, they sometimes hate each other, because they refer and report to a common leader, or rather because they have common goals?

Thus, my lesson #1 in management would consist in observing patterns of behaviour in people around me. What exactly do they do together? How do they cooperate? How do they compete against each other? It is important, in that first lesson, out of the five (allegedly) easy steps, to observe rather than speculate. Just find patterns in human behaviour. The easiest way to do it is sequencing. Any pattern, in any part of observable reality, is a sequence of events. As you observe human behaviour around you, look for recurrent sequences. There are bound to be some. Mr A holds a meeting, every three of four days, with persons B, C, D, and E. The meeting usually lasts about one hour. The person D is usually pissed off, after those meetings.

Another one; when a customer complains about poor quality of the product, those complaints usually trigger a row. Who is arguing with whom?

Lesson #2 means jumping to another source of information: financial statements. Here, a remark. I know many people have a profound disgust of numbers and mathematics, usually because of shitty teaching thereof at the level of elementary school. Still, the outcomes of shitty teaching can be reverted, simply by triggering our own curiosity into action. The financials of an organisation are like the health metrics of a human. If you want to know somebody’s health, you need to understand the meaning of numbers like pulse, body temperature, the average length of sleep time during one night etc. Same thing with financials. They are pertinent metrics of an organism, period.

So, you go to those financials, and you take all of them, like the balance sheet, the income statement, the cash flow statement, and you simply look for the greatest numerical values. You figure out what is sticking out, quite simply. You select the categories attached to those numbers, and you connect them, as if you were connecting the dots in one of those graphical quizzes. This is an almost painfully basic, practical application of the scientific principle known as ‘the Ockham’s razor’. The principle states that the most obvious answer is usually the right one, where the most obvious means the one which requires the least assumptions. In this case, the greatest financial values are supposed to be the most important.

You can also get more sophisticated, during lesson #2, and take financial statements from two distinct periods, in the same organisation. You match the financial categories from two periods, and you calculate the relative magnitude of change, like value from the period T1 (later), divided by the value observed in the same category in period T0 (earlier). If you move along this tangent, you will pay attention to those categories, where the relative magnitude of change x(T1)/x(T0) is the greatest, in plus or in minus.

Lesson #2 teaches you basic empirical observation of quantitative variables, and now, in lesson #3, you are going to combine those empirical observations with the patterned human behaviour from lesson #1. Whatever type of measurement you chose in lesson #2 – the greatest absolute financial values or those displaying the greatest magnitude of change – in lesson #3 you assume that people do things about money. The patterns of behaviour you nailed down in lesson #1, they have a function, and that function is most likely connected to those big, or those quickly changing, financial amounts you observed in lesson #2. In lesson #3, therefore, you are pinning down the actual strategy – or strategies – in the organisation you are studying.

Here, one important distinction is due. The commonly used definitions of strategy, in management science, usually refer to the goals of the organisation, and the tasks planned in order to achieve those goals. Me, in my own little scientific garden, I cultivate the beautiful, behavioural flower of no-bullshit. I deeply agree with Bernard Bosanquet who used to say that it is bloody hard to know for sure what people want, and it is much more sensible to watch what they do. I also cherish John Nash’s point of view, namely that a strategy needs to have reasonably proven payoffs if it is to be seriously used in the future. To me, a strategy is a recurrently repeated pattern of action, with recurrently occurring results. A strategy can be something that people – or organisations – do even without being aware of doing it.

Anyway, in lesson #3, you define those connections between money and behaviour, as the typical strategies in the given organisation. Time has come for lesson #4, the lesson of what-if, the lesson of change. You know what people usually do in an organisation, you know what they are after, in terms of financial payoffs, and now you can imagine what will happen to this organisation if some of those parameters change. For example, what kind of change will this business – if this is a business, of course – undergo if they have the opportunity to attract an extra 40% of equity? (i.e. an addition of equity capital equal to 40% of what they already have as equity; search for the definition of ‘equity’, just to make sure you know what I am talking about). What would happen if they had to cut their equity down by 40%? What kind of strategies would they apply if there is a new opening, in their target market, which allows to pump their gross margin up by 20%, through higher prices? What if a new tax cuts their gross margin down by 20%?

Time for lesson #5, which is of the same kind as lesson #5 about the market of energy: design and control an experiment. Take the organisation you have studied in lessons #1 – #4. You can use the hypothetical changes you traced in lesson #4, or something else that comes to your mind as intriguing, like what-happens-if-I-press-this-button-oops-I-am-sorry but now transform those paths of change into experimental sequences. You give people some input – a task, a piece of information etc. – and you design a detailed sequence of how they should be responding to that input. You design that sequence so as the response, observed in the participants of your experiment, brings you the most valuable information possible.

You know what? I start liking that approach ‘learn Whatever The Hell You Want in 5 Lessons’. I know, I know: liking my own ideas is a slippery path. It is easy to misstep and fall into the abyss of hypocrisy. Still, I like the thing. Those five lessons about the market of energy seem to cover pretty much the basics of Microeconomics, one of my main teaching curriculums, and so, having covered microeconomics and management, I attempt a graceful jump towards another of my teaching paths, that of Political Systems and Economic Policy.

In order to make my jump look more graceful, i.e. in order to mask the possible awkwardness of my movements, I am doing something I like doing: I revert. I like reverting. This time, when teaching something about Political Systems, I will start, in lesson #1, by asking my students to design an experiment. Yes, this time, they start at the point where the students of management would be asked to finish. Let’s take a practical case: the constitution of The United Republic of Tanzania. The one from 1977.

Click this link, download the constitution and ask yourself the following question: how could you possibly stress-test the system? I mean, where can you see the weakest spots in the constitutional order? What sort of phenomena can hypothetically turn this order into disorder, and into what kind of disorder? At this stage, as this is your lesson #1, you can advance pretty intuitively. I am giving an example. In Part II, Article (47), points (1) and (2) of this constitution you can find the following rule: « 47.-(1) There shall be a Vice-President, who shall be the principal assistant to the President in respect of all the matters in the United Republic generally and, in particular shall assist the President in making a follow-up on the day-to-day implementation of Union Matters, perform all duties assigned to him by the President, and perform all duties and functions of the office of President when the President is out of office or out of the country. Without prejudice to the provisions of Article 37(5), the Vice-President shall be elected in the same election together with the President, after being nominated by his party at the same time as the Presidential candidate and being voted for together on the same ticket. When the Presidential candidate is elected the Vice-President shall have been elected. »

Now, imagine that for some reasons, the Vice-President has not been elected, or has been elected but he or she has resigned right after having been elected, and there is no one willing to take the office. In short, no Vice-President. What happens to the political system of Tanzania in such a case? Is it like that block of domino, which, once knocked down, drags the entire constitutional order into deep s**t (spell, as usually, s-asterisk-asterisk-t)? Or, maybe it is just a minor inconvenience?

Take another constitution, that of Australia. Do the same scanning as for this particular case. Look for really soft spots in the system: the institutions, political actors, or mutual checks of power between political actors, which, once disabled or out of control, can knock the whole system out of balance. The question is quite important, by the way. The Australians have the tenth Prime Minister appointed, over the last 10 years. This is a lot of change. Some kind of deep imbalance might be at work. Maybe you can put your finger on it?

Time for lesson #2: generalize the experiments from lesson #1. Take the same countries, those from lesson #1, Tanzania and Australia in the occurrence, and try to sketch the alternative avenues their respective political systems could possibly take from the present moment, into the future. Like three alternative paths of change for each country.

Lesson #3: generalize the observable idiosyncrasies from lessons #1 and #2. What structural (i.e. durable) differences can you notice between the two cases, Tanzania and Australia? What sort of difference between them can you pin down, as for the relative solidity of their constitutional orders, as well as regarding their possible paths of change? How would you describe the unique features observable in each of those political systems?

Lesson #4: figure out the rules of the game. If you had to give a piece of advice to your friend, like how to make a political career in Tanzania, what would you recommend? What does it mean to make political career in Tanzania? What are the most likely stages and pit stops? How long could it take to make the career in question? What strategies should your friend use to cover that path?

Move your (imaginary?) friend to Australia and try to repeat the process of designing their career path in politics. How is it different from Tanzania?

Lesson #5: nail down general metrics for political systems. Sum up your experience from lessons #1 – #4. Now, imagine that somebody asks you: ‘What are the most important facts and numbers to look upon if we want to understand how a given political system works? Which stones should we lift and turn in order to discover the fundamental mechanics of a political system?’. Now, I know that you might feel slightly ill at ease at this point. How can I make general rules on the grounds of two case studies? Well, firstly, this is how science works: brick by f***ing brick, you build that house. You observe one thing, you observe another thing, and you draw your conclusions even if you are not aware of drawing them. That whole piece of intellectual gymnastics, in 5 lessons, serves to make you aware of how you generalize.

Besides, as it comes to political systems, you do not have like a huge sample of cases; it is barely 150 more or less observable entities on the entire planet.

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?

Support this blog

€10.00

My own zone of proximal development

 

Let’s face it: I am freestyling intellectually. I have those syllabuses to prepare for the next academic year, and so I decided to let my brain crystallize a little bit, subconsciously, without being disturbed, around the business plan for the EneFin concept. Crystallization occurs subconsciously, and I can do plenty of other thinking in the meantime, and so I started doing that other thinking, and I am skating happily on the thin ice of fundamental questions concerning my mission as a scientist and a teacher. The ice those questions make is really thin, and if it cracks under my weight, I will dive into the cold depth of imperative necessity for answers.

You probably know that saying about economics, one of my fundamental disciplines, besides law, namely that economics are the art of making forecasts which do not hold. Nasty, but largely true. I want to devise a method of teaching social sciences, and possibly a contingent method of research, which can be directly useful to the individual, without said individual having to become the president of something big in order to find real utility in social sciences.

I am starting to form that central principle of my teaching and research: social sciences can be used and developed similarly to geography, i.e. they can be used to find one’s bearings in a complex environment, to trace a route towards valuable and attainable goals, and to plan for a realistic pace as for covering this route. Kind of a fundamental thought comes to me, from the realm of hermeneutic philosophy , which I am really fond of, and the thought goes as follows: whatever kind of story I am telling, at the bottom line I am telling the story of my own existence. Question (I mean, a real question, which I am asking right now, not some fake, rhetorical stuff): this view of social sciences, as a quasi-cartographic pathway towards orienting oneself in the social context, is it the story of my own existence? Answer: hell, yes. As I look back at my adult life, it is indeed a long story of wandering, and I perceive a substantial part of that wandering as having been pretty pointless. I could have done much of the same faster, simpler, and with more ethical value achieved on the way. Mind you, here, I am largely sailing the uncharted waters of ‘what could have happened if’. Anyway, what happened, stays happened.

OK, this is the what. Now, I want to phrase out the how. Teaching means essentially two things. Firstly, the student gets to know the skills he or she should master. In educational language it is described as the phase of conscious incompetence: the student gets to know what they don’t know and should develop a skill in. Secondly, teaching should lead them through at least a portion of the path from that conscious incompetence to conscious competence, i.e. to the phase of actually having developed those skills they became aware of in the phase of conscious incompetence.

Logically, I assume there is a set of skills that a person – especially a young one – needs to find and pursue their personal route through the expanse of social structure, once they have been dropped, by the helicopter of adolescence and early adulthood, in some remote spot of said structure. My mission is to use social sciences in order to show them the type of skill they’d better develop, and, possibly, to train them at those skills.

My strictly personal experience of learning is strongly derived from the practice of sport, and there is a piece of wisdom that anyone can have as their takeaway from athletic training: it is called ‘mesocycle’. A mesocycle of training is a period of about 3 months, which is the minimum time our body needs to develop a complex and durable response to training. In any type of learning, a mesocycle can be observed. It is the interval of time that our nervous system needs to get all the core processes, involved in a given pattern of behaviour being under development, well aligned and acceptably optimized.

My academic teaching is structured into semesters. In the curriculum of each particular subject, the realistic cycle of my interaction with students is like 4 months, which gives room to one full mesocycle of training, from conscious incompetence towards conscious competence, plus a little extra time for outlining that conscious incompetence. Logically, I need to structure my teaching into 25% of developing the awareness of skills to form, and 75% of training in those skills.

One of the first syllabuses I am supposed to prepare for the next academic year is ‘Introduction to Management’ for the undergraduate major of film and TV production. It is part of those students’ curriculum for the first year, when, essentially, every subject is an introduction to something. I follow the logic I have just outlined. First of all, what is the initial point of social start, in the world of film and TV production? Someone joins a project, most frequently: the production of a movie, an advertising campaign, the creation of a You Tube channel etc. The route to follow from there? The challenge consists in demonstrably proving one’s value in that project in order to be selected for further projects, rather than maxing out on the profits from this single venture. The next level consists in passing from projects to organisation, i.e. in joining or creating a relatively stable organisation, combining networks and hierarchies, which, in turn, can allow the sprouting of new projects.

Such a path of social movement involves skills centred around the following core episodes: a) quickly and efficiently finding one’s place in a project typical for the world of film and TV production b) starting and managing new projects c) finding one’s place in networks and hierarchies typical for film and TV production and d) possibly developing such an organisation.

Such defined, the introduction to management involves the ability to define social roles and social values, peculiar to the given project and/or organisation, as well as elementary skills in teamwork. As I think of it, the most essential competences in dealing with adversity, like getting one’s s**t together under pressure and forming a realistic plan B, could be helpful.

Good. Roles and values in a project of film and TV production. What comes to my mind in the first place, as I am thinking of it, is once again the teaching of Hans Georg Gadamer, the heavyweight champion of hermeneutic philosophy: historically, art at its best has been a fully commercial enterprise, based on business rules. Concepts such as ‘art for the sake of art’ or ‘pure art’ are relatively new – they emerged by the end of the 19th century – and they are the by-product of another emergence, that of the so-called leisure class, made of people rich enough to afford not to worry about their daily subsistence, and, in the same time, not seriously involved into killing someone in order to stay this way.

One of the first social patterns to teach my students regarding the values of film and TV production is something which, fault of a better word, I call ‘economic base’. It is a value, in this business, to have a relatively predictable stream of income, which is enough for keeping people working on creative projects. The understanding I want my students to form, thus, is precisely this economic base. How much do I need to earn, and how, if I want to keep working on that YT channel long enough for turning it into a business? What kind of job can I do whilst running such a project? How much capital do I need to raise in order to make 50 people work on a movie for 6 months? I think that studying the cases of real businesses in the film and TV production, and building simple business plans on the grounds of those cases can be a good, skill-forming practice.

Once this value identified, it is important to understand how people are most likely to behave whilst striving to achieve it. In other words, it is about the fundamentals of social competition and cooperation. A simple version of the theory of games seems the most workable, in terms of teaching tools.

The economic base for creative work makes one important value, still not the only one. Creation itself is another one. Managing creative teams is tricky. You have a bunch of strong personalities, and you want them to stay this way, and yet you want them to reach some kind of compromise. I think that simple role playing in class, paired with collective projects (i.e. projects carried out by teams of students) can be instructive.

I am summing up. I am a big fan of long-term tasks as educational tools. Preparing a simple business plan, specific to this precise industry (i.e. film and TV production), paired with training in teamwork, should do the job. Now, the easy path is just to tell students ‘Listen, guys! You have those projects to complete until the end of the semester. Just get on with it. We will be having those strange gatherings called “lectures”, but you don’t have to pay too much attention to it. Just have those projects done’. I have already experimented with this approach, and my conclusion is that it generally allows those clever ones to prove they are clever, but not much more. It is a pity to watch those less clever students struggling with a task they have to carry out over the length of one semester.

I want to devise come kind of path in my students’ zone of proximal development : a series of measured, feasible lessons, leading to tangible improvement. Each lesson covers 6 steps: i) define the project to carry out, as well as its goals and constraints, make a plan, make a team, and make them work on the thing ii) purposefully lead to a crisis iii) draw conclusions from the crisis iv) define the improvement needed v) carry out the improvement and vi) check the results.

As I see my usual schedule over one semester, I can arrange like 5 such sequences of 6 steps, thus 5 big lessons. Now, I am thinking about the kind of core task to carry out in each lesson, so as the task is both representative for film and TV production, and feasible in class. Pitching the concept of a movie is a must, and the concept of a YT platform seems to be a sensible idea as well. I have two types of business concepts, and I feel like repeating each of them twice. That gives 4 sequences of training, and leaves one more in reserve. That one more could be, for example, a content store, in the lines of the early Netflix.

Good. One thing to tick off. As I am having a look at it, the same pattern can be transferred, almost as it is, into the curriculum of Principles of Management, which I teach to the 1st year undergraduates in the major of International Relations. In this particular case, the same path is applicable, just the factual scope needs a bit of broadening. Each of those complex, sequenced lessons should be focused on a different type of business. Typical industrial, for one, something in the IT sector, for two, then something really scientific, like biotech, followed by typical service business, and finally something financial.

Now, I jump. It happens all the time in my mind. Something in those synaptic connexions of mine makes them bored with one topic, and willing to embrace the diversity of being. I am asking myself what I can possibly teach to my students, in terms of finding one’s way across the social jungle, on the grounds of the economic theory which either I fully embrace or I have developed by myself. Here come a few ideas.

However inventive and original you think you are, you are as inventive and original as quite a bunch of other people’. This one comes mostly from my reading of Joseph Schumpeter’s theory of creative destruction and neighbourhood of equilibrium. How can it be useful? If you want to do something important, like starting a business or a social action, going for a job connected to expatriation etc.? Well, look for patterns in what other people do. Someone is bound to have the kind of experience you can learn from.

This is deeper than some people could think. As I work with my students on the general issue of business planning, this particular approach proves really useful. There are many instances of complex business planning – the ‘what if?’ sequences, for example – when emulating some existing businesses is the only sensible approach.

The next one spells: ‘Recurrent bargaining leads to figuring out sensible, workable compromises that minimize waste and that nobody is quite satisfied with’. This principle refers to the theoretical concept of local Marshallian equilibrium, but it is also strongly connected to the theory of games. Frequently, you have the impression of being forced into some kind of local custom or ritual, like the average wage you can expect for a given job, or the average rent you have to pay for your apartment, or the habitual way of settling a dispute. It chafes, and it hurts what you perceive as your own originality, but people around you are strangely attached to this particular way of doing things. This is a local equilibrium.

If you want to understand a given local equilibrium, try and figure out the way this equilibrium is being achieved. Who? What? When? How? Under what conditions does the process work, and in which cases it doesn’t? In other words, if you want to figure out the way to influence and change those uncomfortable rituals around you, you need to find a way of making people bargain and get a compromise around a new ritual.

Comes my own research, now, and the fundamental principles of social path-finding I can phrase out of that research. I begin with stating that population matters, in the most numerical sense. The rate of demographic growth, together with the rate of migration, are probably the most powerful social changes we can imagine. Whatever those changing populations do, they adapt to the available supply of food and energy. At the individual level, people express that adaptation by maximizing their personal intake of energy, within socially accepted boundaries, by maintaining a certain portfolio of technologies. Social structures we live in act as regulators of the technological repertoire we have access to, and they change as this repertoire changes.

Practical implications? You want to experience creative social change, with a lot of new types of jobs emerging every year, and a lot of new products? You need a society with vivid demographic growth and a lot of migration going in and/or out. You want security, stability and predictability? You want people around you to be always calm and nice to each other? Then you need a society with slow or null demographic growth, not much of a migration, and plenty of food and energy to tap into. You want to have both, i.e. plenty of creative change, and people being always nice? Sorry, pal, not with this genotype. It just wouldn’t work with humans.

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?

Support this blog

€10.00

L’étiquette « stratégie »

Mon éditorial

Je suis en train de préparer quelques études des cas de management stratégique, pour des applications pédagogiques. J’essaie de faire une connexion avec ma recherche et d’utiliser les idées fraîchement empruntées de Peter Turchin, Thomas E. Currie, Edward A. L. Turner, et Sergey Gavrilets (Turchin et al. 2013[1]). La première étude de cas est celle d’une société américaine Life Point Health Inc. spécialisée dans les soins médicaux. Je m’y intéresse dans le contexte de cette notion générale d’intelligence collective, dont je suis obsédé – avec modération toutefois – à la suite de ma recherche sur le changement technologique et les systèmes monétaires. Comme cas d’étude sur la stratégie, Life Point Health présente deux traits intéressants. Toute grande organisation a besoin d’une stratégie pour se développer, seulement dans le cas des soins médicaux nous avons un autre besoin en jeu : une société (celle, qui fait l’environnement social de Life Point Health) a besoin de soins médicaux organisés, et donc elle a besoin d’un fournisseur de tels soins, qui, à son tour, aie une stratégie rationnelle de développement. La question générale que je pose dans ce cas est la suivante : est-ce qu’une stratégie est la manifestation d’une intelligence collective locale et endogène (celle de l’organisation) ou bien d’une intelligence collective généralisée et exogène par rapport à l’organisation (celle de tout son environnement social) ?

A ce point-là, une autre dimension de ce cas spécifique devient intéressante : celle de la formation de réseau. Life Point Health est une organisation à réseau, avec 72 campus médicaux localisés dans 22 états des Etats-Unis et avec une spécialisation claire dans les zones non-urbaines. Un business à réseau, ça peut se former de deux façons distinctes : une entité parmi plusieurs peut devenir le noyau dominant ou bien plusieurs entités peuvent décider de coopérer à pied d’égalité (ou presque). Les deux cas peuvent être étudiés du point de vue d’intelligence collective, sur la base conceptuelle offerte par cet article de Turchin et al. que je viens de citer au début du paragraphe précèdent. Turchin et al. étudient la formation des systèmes politiques et non pas des réseaux de business, mais c’est justement l’analogie entre les deux qui m’intéresse. Turchin et al. assument que la distinction entre une petite structure sociale et une grande réside dans la relation entre les distributions respectives des coûts et des bénéfices liés à la socialisation. Une petite structure sociale est celle où chaque membre de la société a une expérience directe des deux : je sacrifie un peu de mon autonomie personnelle et je vois clairement, dans ma vie de tous les jours, les bénéfices qui découlent d’un tel sacrifice. Le bénéfice le plus évident est le fait d’avoir une vie de tous les jours. La formation de telles structures, basées sur l’expérience des gains individuels, est la socialisation de base.

En revanche, une grande structure sociale est celle où la distribution des coûts de socialisation diffère de celle des bénéfices. Les coûts demeurent locaux, comme dans une petite structure, mais les bénéfices deviennent plus concentrés et prennent la forme de ce que Turchin et al. dénomment « institutions ultrasociales » – système politique, armée, système légal etc.- qui à leur tour ont une importance vitale dans la compétition entre sociétés. Au niveau individuel, les bénéfices d’ultrasocialisation sont présents mais le plus souvent indirect. L’un des plus manifestes, selon Turchin et al., est le fait de ne pas être exterminés, comme communauté locale, par une grande structure sociale du pays d’à côté qui s’est ultrasocialisée plus vite et plus profondément. Par analogie entre les structures politiques et celles d’affaires, j’assume que lorsqu’un réseau des business locaux se forme – comme le réseau d’hôpitaux de province dans la structure de Life Point Health – il peut y avoir une logique de socialisation de base (on coopère pour avoir des bénéfices directs de coopération) ou bien une logique d’ultrasocialisation (on se laisse aspirer dans un réseau pour ne pas être éliminés du marché par d’autres réseaux). Dans mon étude de cas de Life Point Health, je pose la question suivante : si j’ai en face de moi un ensemble amorphe d’hôpitaux de province, quelle est la probabilité qu’ils forment un réseau de coopération à pied d’égalité, selon le paradigme de socialisation simple ? Quelle est la probabilité qu’ils forment un réseau autour d’un noyau dominant, selon le modèle d’ultrasocialisation ?

Je superpose mes deux questions stratégiques et je vois quelque chose comme une matrice binomiale de Pascal : la stratégie d’une organisation peut être endogène ou bien exogène, et -quoi qu’il en soit – lorsque cette stratégie implique la formation d’un réseau d’organisations, ledit réseau peut se trouver alimenté par la socialisation simple sur la base des gains directs de coopération, ou bien par l’ultrasocialisation hiérarchique autour d’un noyau de pouvoir, forcée par une compétition féroce entre réseaux. Bon, à ce point-là mon moine interne – vous savez, ce gars austère qui se balade avec un gros rasoir d’Ockham dans sa poche – demande un peu de simplification. La formation d’un réseau à travers l’ultrasocialisation forcée par la compétition etc. : là, il y a définitivement trop de « tion » et ça à l’air un tout petit peu détaché de la réalité. Faut décomposer le problème en des morceaux possibles à avaler. Mon rasoir d’Ockham prend alors la forme des questions de base qu’on se pose dans toute recherche scientifique. Premièrement, pourquoi s’emmerder du tout avec ces stratégies ? A quoi bon ? Grandes organisations ont un impact sur notre vie de tous les jours, à commencer par l’influence sur la durée de ladite vie – mon cas de départ, Life Point Health Inc, est active dans le domaine des soins médicaux et donc c’est le cas de le dire – en passant ensuite à travers des différents aspects de ce que nous appelons « la qualité de vie » – salaires, prix, architecture, infrastructure – et en terminant par des trucs comme financement des campagnes électorales de nos hommes et femmes politiques. En plus, les stratégies que les dirigeants des grandes entreprises annoncent comme leurs ont une tendance intéressante à différer substantiellement de ce que les mêmes grandes entreprises font tous les jours. Un PDG d’un distributeur d’énergie annonce qu’à partir du Noël ils vont « créer plus de valeur » et moi, je découvre que cela se manifeste par un prix plus élevé sur ma facture d’électricité.

Bon, alors je sais que l’intérêt d’étudier des stratégies vient du fait qu’il y a un tas d’incohérence entre le discours et l’action là-dedans et ce tas a un impact profond sur ma vie. La seconde question de fond est l’objectif de la recherche. Mon intuition me dit que la direction la plus prometteuse de toute recherche est celle centrée sur le « comment ? » des choses. Comment est-ce que nous venons à coller l’étiquette « stratégie » sur ce que les organisations font, ainsi sur ce que leurs dirigeants déclarent qu’ils font ? Comment se forment-elles, ces séquences d’actions que nous nommons « stratégies » ?

Je suis d’humeur exploratrice et j’essaie donc de former une hypothèse forte. Une hypothèse forte requiert des assomptions faibles, c’est-à-dire des assomptions qui ne disent pas grand-chose. Je fais deux assomptions, plutôt faiblardes de mon point de vue. Une, il y a différence de fond entre discours et action, donc entre le discours sur la stratégie de l’organisation d’une part et les actions de cette même organisation d’autre part. Deux, il y a cohérence de second degré entre discours et action, c’est-à-dire un changement perceptible du discours stratégique témoigne d’un changement au niveau de l’action. En des mots plus simples, mes deux assomptions veulent dire que les gens font une chose et disent qu’ils font quelque chose de différent, et en même temps, lorsque les mêmes gens changent la façon dont ils décrivent leurs actions, ils ont le plus vraisemblablement modifié leur comportement.

Je visite donc le site http://www.lifepointhealth.net/investor-relations , j’y fouine jusqu’à je trouve leur dernier rapport annuel, pour l’année 2016, en forme officielle 10-K et je cherche là-dedans pour trouver du discours stratégique bien filtré. A la page 3, je trouve un chapitre intitulé « Business Strategy ». Ça peut correspondre et ça dit, entre autres :  « Nous croyons que des opportunités de croissance demeurent dans nos marchés existants. La croissance dans nos établissements existants dépend, en partie, du succès de nos hôpitaux dans le recrutement des médecins pour leurs personnels médicaux respectifs, de l’activité de ces médecins comme membres d’équipe, de leur expérience relativement longue dans nos hôpitaux, et enfin de de leur rôle dans l’admission des patients internes ainsi que dans l’administrations des soins aux patients externes ». Le discours stratégique, il y en a plus dans ce chapitre, mais concentrons-nous sur ce passage précis. Ça dit que le mécanisme du business, chez Life Point Health, s’appuie tout d’abord sur le premier contact du patient avec l’hôpital. Je perçois deux options fondamentales : soit le patient rencontre un médecin membre du personnel et les évènements prennent la tournure A, soit il a son premier contact avec quelqu’un d’autre (membre du personnel administratif, agent d’assurance médicale, médecin en contrat temporaire etc.) et alors les évènements se déroulent selon le scénario B. Le tour de phrase dans le discours stratégique cité suggère que le scénario A est définitivement plus productif pour l’organisation que le scénario B et c’est l’incidence des contacts type A avec les patients qui pompe le résultat d’exploitation dans les marchés existants. Lorsque vous allez dans quel hôpital que ce soit, quelles sont les chances que votre médecin traitant soit la même personne que celle qui vous aie accueilli après que vous ayez franchi la porte de l’hôpital ? Je vais vous dire : ces chances sont maigres. Cela ne se pratique pratiquement pas, au moins pas en Europe. Soit le modèle stratégique décrit dans ce court fragment est totalement con et détaché de la réalité, peut-être même dangereux pour les patients, soit il est unique dans son efficacité.

[1] Turchin P., Currie, T.E.,  Turner, E. A. L., Gavrilets, S., 2013, War, space, and the evolution of Old World complex societies, Proceedings of The National Academy of Science, vol. 110, no. 41, pp. 16384 – 16389

 

Educational: microeconomics and management, the market and the business model

My editorial

This time, in the educational stream of my blog, I am addressing the students of 1st year undergraduate. This update is about microeconomic and management. Regarding your overall educational curriculum, these two courses are very much complementary. I am introducing you now into the theory of markets, and, in the same time, into the managerial concept of business model. We are going to consider a business of vital importance for our everyday life, although very much unnoticed: energy, and, more specifically, electricity. We are going to have a look at the energy business from two points of view: that of the consumer, and that of the supplier. If you have a look at your energy bill, you can basically see two lines: a fixed amount you pay to your supplier of energy, just for being connected to the grid, and a variable amount, which is, roughly speaking, the mathematical product: [Price of 1 kWh * Quantity of kWh consumed]. Of course, ‘kWh’ stands for kilowatt-hour. On the whole, your expenditure on electricity is computed as:

E = Fixed price for connection to grid + [Price of 1 kWh * Quantity of kWh consumed]

                             P1                                                                 P2                                 Q   

From the point of view of the supplier of energy, their market is made of N consumers of energy. We can represent this market as a set made of N elements, for example as N = {k1, k2, …, kn}, where each i-th consumer ki pays the same fixed price P1 for the connection to the grid, the same price P2 for each kWh consumed, and consumes an individually specific amount Q(ki) of energy measured in kWh. In that set of N = {k1, k2, …, kn} consumers, the total volume Q of the market is computed as:

Q = Q(k1) + Q(k2) + …+ Q(kn) [kWh]

…whilst the total value of the market is more complex a construct, and you compute it as:

Value of the market = N*P1 + Q*P2

  Most consumers have a more or less fixed budget to spend on electricity. If you take 1000 people and you check their housing expenses every month, you will see that their expenditures on electric power are pretty constant, unless some of them are building spaceships in their basements. So we introduce in our model of the market a budget on electricity, or Be, specific to each individual customer ki. Hence, that budget can be noted as Be(ki). Actually, that budget is the same as what we have introduced earlier as expenditure E, so:

Be(ki) = E = P1 + P2*Q(ki)

This mathematical construct allows reverse engineering of individual power consumption. Each consumer uses the amount Q(ki) of kilowatt-hours, which satisfies the condition:

Q(ki) = [Be(ki) – P1] / P2

In other words, each of us has a budget to spend on electricity bills, from this budget we subtract the fixed amount of money P1, to pay for being connected to the power grid, and we use the remaining sum so as to buy as many kilowatt-hours as possible, given the price P2. This condition is a first approach to what is called the demand function, on the part of the consumers. Although this function is still pretty sketchy, we can notice one pattern. The total amount of electricity Q(ki) that I consume depends on three parameters: my budget Be(ki), and the two prices P1 and P2. In economics, we call this an elasticity. We say that the quantity Q(ki) is elastic on: Be(ki), P1, P2. How elastic is it? We can calculate it, if we now the magnitudes of change in particular factors. If I know that my consumption of electricity has changed from like 40 000 kWh a year to 42 000 kWh, and I know that in the meantime the price P2 of one kilowatt-hour has moved from 0,1 euro to 0,12 euro, I can calculate something called deltas:

delta [Q(ki)] = ∆ Q(ki) = 42 000 40 000 = 2 000 kWh

delta (P2) = ∆P2 = €0,12 €0,1 = €0,02

The local (i.e. specific to this precise situation) elasticity of my consumption Q(ki) to the price P2 can be estimated, in a first approximation, as

e = ∆ Q(ki) / ∆P2 = 100 000 kWh per €1

The first thing to notice about this elasticity is that it is exactly contrary to what you see in my lectures, and what you can read in textbooks, about the demand function. The basic law of demand says something like: the greater the price, the lower the consumers’ willingness to buy. Here, we have something contrary to that law: greater consumption of energy is associated with a higher price, through a positive elasticity. I am behaving contrarily to the law of demand. In science, we call such a situation a paradox. Yet, notice that it is a local paradox: I cannot keep on increasing my personal consumption of electricity ad infinitum, even in the presence of a constant price. At some point, I have to start saving energy and increase my consumption just as much, as the prices possibly fall. So, generally, as opposed to locally, I am likely to behave in conformity with the law of demand. Still, keep in mind that in real life, paradoxes abound. It is not obvious at all to peg down a market equilibrium exactly as shown in textbooks. Most real-life markets are imperfect markets.

Now, if you look at this demand function, you can find it a bit distant from how you consume electricity. I mean, personally I don’t purposefully maximize the quantity of kilowatt-hours consumed. I just buy stuff powered by electricity, like a computer or a refrigerator, I plug it in, I turn it on, and I use it. Sometimes, I vaguely practice energy saving, like turning off the light in rooms where I am not currently staying. Anyway, my consumption of electricity Q(ki) is determined by the technology T I have at my disposal, which, in turn, consists of a set M = {g1, g2, …, gm} of goods powered by electricity: fridge, computer, TV set etc. We say that each j-th good gj, in the set M, is a complementary good to electricity. I can more or less accurately assume that an average refrigerator consumes x1(fridge) kWh, whilst an average set of house lighting burns x2(lighting) kWh. We can slice subsets out of the set N of consumers: N1 people with fridges, N2 people with air conditioners etc. With Q(gj) standing for the consumption of electricity in a given item powered with it, I can write:

 Q(ki) = N1*Q(g1) + N2*Q(g2) + …+ Nm*Q(gm) = [Be(ki) – P1] / P2

It means that, besides being elastic on my budget and the prices of electricity, my individual demand for a given amount of kilowatt-hours is elastic on the range of electricity-powered items I possess, and this, in turn, means that it is elastic on the budget I spend on those pieces of equipment, as well as on the prices of those goods (with a given budget to spend on houseware, I am more likely to buy a cheaper fridge rather than a more expensive one).

Now, business planning and management. Imagine that you are an entrepreneur, and you want to build a solar farm, and sell electricity to the people living around it. Your market works as shown above. You know that whatever you want to do, your organisation will have to satisfy the needs of those N customers, with their individual budgets and their individual elasticities in expenditures. The size of your organization, and its structure, will be significantly determined by the necessity to maintain profitable relations with N customers. Two questions emerge: what such organizational structure (i.e. the one serving to build and maintain those customer relations) would look like, and how could it be connected to other functional structures in the business, like building the solar farm, maintaining it in good technical state, purchasing components for construction and maintenance, hiring and firing people etc. You certainly know one thing: you have a given value of the market = N*P1 + Q*P2 and you have to adapt your costs (e.g. the sum total of salaries paid to your people) to this value of the market. Thus, you know that:

Average salary in my business = [(N*P1 + Q*P2) – The profit I want – Other costs] / the number of employees

In other words, the size of my business, e.g. in terms of the number of people employed, as well as my profit and the wages I can pay, will be determined by the value of my market. Now, let’s go along a path at the frontier of economics and management. I want to know how much capital I should invest in my business. I posit a condition: that capital should return to me, in the form of profits from business, in 7 years. Thus, I know that:

My initial investment = 7* My annual profit = 7*(N*P1 + Q*P2 – Current costs) = N*Be(ki) current costs = N*E current costs = N*[P1 + P2*Q(ki)] current costs

This is how the size of my business, both in terms of capital invested, and in terms of the number of people employed, is determined by, or is elastic on, the prices I can practice with my customers, the sheer number of those customers, as well as on their individual budgets.

Educational: Opening remarks for the winter semester 2017/2018

My editorial

As the academic year starts, I start using my scientific blog for educational purposes, too. During the winter semester 2017/2018, I will be holding classes in English in the following subjects (curriculums): International Economic Transactions, Economic Policy, Principles of Organization and Management, Microeconomics, and Undergraduate Thesis Seminar. In order to assure as smooth a delivering of educational content as possible, I will be using my two, mutually mirroring scientific blogs, to find respectively at  https://discoversocialsciences.com or at https://researchsocialsci.blogspot.com . By ‘mirroring’ I mean that every update on one blog has a twin on the other, and the reason for mirroring is my willingness to be present in two environments: Blogger, and Word Press. My students can feel free to browse any content I am placing there, and the updates specifically addressed to your curriculum will be labelled as: ‘Educational’ followed by the name of the subject, followed by any additional information. If you need to contact me individually, here are my email addresses: kwasniewski@afm.edu.pl  or  krzysztof.wasniewski@gmail.com .

Curriculum ‘International Economic Transactions’

This specific update addresses specifically the curriculum labelled ‘International Economic Transactions’, at the graduate (Master’s) level of studies. In these classes, we will be studying various types of international economic relations, and to that extent, it will be very much a development on what you have already learnt in the classes of macroeconomic, international trade or economic policy, during your Undergraduate studies. Still, there is one particularity to this particular curriculum, namely the focus on the process of institutionalisation in international economic transactions. In these classes, we will be focusing mainly on those aspects of international economic relations, which are institutionalized in international agreements and treaties. In your earlier years of study, you have certainly acquired some knowledge about international organizations like World Trade Organization, European Union, ASEAN and others. You probably remember, as well, the institution of bilateral agreements and treaties between countries. In this class, we are going to focus on the ‘how?’ of those institutions: how do they come into being? what are the premises for the underlying negotiations? what type of phenomena hides behind particular dispositions in those agreements and treaties?

You will be graduating this subject with your individual research project. Your task, and the basis for your final grade in this curriculum, consists in preparing a written analysis of an international economic agreement or treaty. Of course, such an assignment gives rise to questions from your part: what’s the point? what should it look like? which particular agreement or treaty? how to do it? First things first, the point of doing it. The didactic goal of this particular curriculum is to develop your skills in the analysis of documents pertaining to international economic relations, for one, and your presentational skills, for two. I expect the work you will present to demonstrate that you can: a) search and analyse the relevant sources, documentary and others b) wrap your observations up into an intelligible document of your own.

Now, the way your work should look. What I basically expect from you is an essay, of at least 2500 words, with proper referencing of the sources you have used. I will be grading this essay on the grounds of three criteria: scope of research (weight 0,5 in the final grade), depth of analysis (weight 0,5), logic and grammar (acceptable or not). The scope of research means simply the number of sources you convincingly reference in your work. By convincingly referencing I mean, first of all, referencing at all, i.e. providing a proper bibliographic reference to any sources (google up ‘scientific referencing’ or ‘bibliographic referencing’ to know more). Convincing referencing means, in turn, that in the body text of your essay you explicitly refer to those sources, i.e. I can see a logical link between the contents of the source in question and your own writing. The basic source you will have to reference to will be the international agreement or treaty that you will be writing about. Convincingly referencing to the contents of this particular document gives you 1,5 points, or the Polish ‘pass’ grade, namely 3.0, weighed 0,5. If you expand your referencing up to 5 sources in total (books, articles, official policy statements etc.), you get 2,0 points (or 4,0 * 0,5), and referencing more than 5 sources gives you 2,5 (5,0 * 0,5). The depth of analysis means the understanding you demonstrate in your writing. I distinguish four basic levels regarding this criterion of grading. At the lowest level, your writing does not demonstrate any understanding at all. This is the case of those ‘I-will-copy-and-paste-from-Wikipedia’ essays. It is worth a fail, and disqualifies your whole work, even if your reference list looks impressive. I give the ‘fail’ grade to plagiarisms, as well. The basic level of demonstrable understanding, worth 1,5 points (3,0 * 0,5) is an essay, where you describe correctly the economic context of the agreement (treaty) you are working with, but you do not articulate it into an argumentation with a hypothesis. You can get 2,0 points (4,0 * 0,5) if you present an articulate argumentation, but without clear conclusion. Finally, if the flow of logic in your essay convincingly leads to an explicitly formulated conclusion, you get 2,5 (5,0 * 0,5).

Now, a remark as for logic and grammar. As many of my students come from Ukraine, Russia, or other countries in the East, the temptation is strong to Google translate or Yandex translate texts in your native tongue. Still, keep in mind two things. Firstly, automatic translators translate words, not syntax. The syntax used in Russian or Ukrainian, for example, is very different from the English one, especially in the formal register. If you Yandex translate a document, the raw result in English is very likely to be utter gibberish and will disqualify your work for the reason of unacceptable grammar. Besides, I can read Cyrillic, and if I trace back the source document of your translation, we are in the fairy tale of plagiarism, and this is a tale where really bad monsters dwell. One of them is called ‘Disciplinary Procedure with The Dean’.

And so we pass to the ‘how?’. You can choose any international agreement or treaty to work with, as long as it pertains to economic relations between countries. You can be smart, at this point, and take on studying more than one agreement or treaty. Each of those agreements will count as a separate source and will pump up your scope of research. Feel the blues? If you don’t feel like being smart, I can assign you a particular agreement to work with. Just ask. As for the way of working with those sources, you will be using, of course, the content delivered in my classes. As for now, I am giving you the following hints. Firstly, do your research. Go to Google Scholar , Microsoft Academic Research  or to the Social Sciences Research Network and find publications connected to the agreement (treaty) you are working with. Secondly, keep it close to real life. Imagine real situations in business, covered by the scope of the agreement at hand. Imagine how can the enforcement of this agreement change those situations.

Now, I am listing, here below, the fundamental pieces of theory – in other words, the contents of the lecture – you will be smart to google up (or bing up, whatever) and which will make the backbone of our in-class activity:

Fundamental concepts: international agreement, international treaty, signature of an agreement, ratification of a treaty, bilateral and multilateral agreements (treaties), scope (hypothesis) of a legal norm, disposition of a legal norm, sanction of a legal norm, balance of payments (and related concepts), political system, constitutional order, barriers to trade, trade facilitation.

Analytical methods: basic analytical tools of economics, micro and macro.

Typical scopes of international economic agreements and treaties: free trade, selective removal of barriers to trade, facilitation of investment, free flow of capital and people.

Typical institutional forms of international economic cooperation: agreements, treaties, joint ventures and joint operations, international organizations, international agencies.

Case studies (this is an indicative list, still you can use those links, download those documents, and you can use them for your projects): WTO Establishing Marakesh Agreement , GATT 1947, GATT 1994, WTO Trade Facilitation Agreement, United Nations Arms Trade Treaty, Egypt – EFTA Free Trade Agreement, China – Nigeria Bilateral Investment Treaty, and the Charter of The Shanghai Cooperation Organization.     

This is it as for the opening update. See you in class. Now, I pass to sketch the landscape for other curriculums.

Curriculums: ‘Microeconomics’ and ‘Principles of Organization and Management’

The curriculums ‘Microeconomics’ and ‘Principles of Organization and Management’ are both addressed to students in the first year of undergraduate studies. I teach those two subjects to the same group of students, and I am trying to make as much meaningful connection between the two as possible. So, my basic didactic goal in these two curriculums is to give you fundamental analytical skills for preparing a decent business plan, period. My understanding of what a business plan is corresponds to quite broad a range of situations. It can be a business plan strictly spoken: you want to start a business, you go to a bank for a loan, and they ask you to present a business plan. Besides this basic version of events, others are possible. You start some kind of social action, you will need to make it sustainable in financial terms, and so you will need some kind of plan as for how to make capital come to your project and stay there. You work in a corporation, and you can get a promotion if you present a convincing plan, together with a budget, for a project built around an idea of yours. These are all situations, which I refer to when I say ‘business plan’. Any student wants to pass their exams, rather than fail at them, and it is a natural thing that you try to predict the expectations of your professor, me in the occurrence. So, here they are, my expectations: demonstrate your skills in building a business plan.

The curriculum of ‘Microeconomics’ regards the way markets and businesses work, whilst in the path of ‘The Principles of Organization and Management’ we will study the way organizations work and what you can possibly do about it. I am giving, here below, the formal contents of both courses, i.e. the list of theoretical concepts we will be working with this semester. So, the formal contents of ‘Microeconomics’ are the following:

Fundamental concepts of microeconomics: economic good, private goods, public goods, utility, substitute goods, complementary goods, opportunity cost (alternative cost), economic profit, market, capital, assets, equity, debt, fixed assets, circulating assets, value added.

Analytical methods: marginal value, elasticity, isoquant (indifference curve), balance sheet, income statement, statement of cash flow, rate of return on investment, net present value, fundamentals of calculus and of algebra.

Theory of markets: demand, supply, function/curve/law of demand, function/curve/law of supply, perfect competition, Marshallian equilibrium, equilibrium price, equilibrium product, imperfect competition, monopoly, oligopoly, monopolistic competition.

Theory of production: production factors, production function, costs of production, fixed costs, variable costs, total cost, average cost, marginal cost.

Institutional forms of doing business: individual (private) business, partnerships, companies, corporations, cooperatives, non-profit organisations.

Financial markets: money, credit and the supply of money, borrowing capacity, credit risk, interest rate, discount rate, market of securities and types of securities, fundamentals of financial investment, financial risk.

Now, I pass to the contents of the ‘Principles of Organization and Management’:

Fundamental concepts: organization, social structure, hierarchy, behaviour, social communication, goals.

Analytical methods: mathematical probability, sequence and timeline, mathematical sets, goal setting, scenarios.

Theory of organizations: social structures and organizations, types of organizations, process and structure inside an organization.

Theory of communication: media of communication in management, the basic pattern of communication (message > coding > medium > decoding > feedback).

Hierarchy building: types of hierarchies, orders and their formulation, types of orders (directive, semi-directive, non-directive), enforcement of orders.

Network building: negotiating and contracting, stable and unstable networks, the use of network-type structures.

Uncertainty and risk: types of risk, evaluation of risk, operational risk, financial risk, systemic risk.

Basic functions of management: organizing, marketing, human resource management, finance and investment, production.

Good, now that you know the contents of the course, the next question is ‘where should we take all that stuff from?’, or the question about your resources. Firstly, you can try and participate in those strange gatherings we will have at the university. They are called ‘classes’, ‘lectures’ (PL: wykład) or ‘workshops’ (PL: ćwiczenia) in your schedule and sometimes they are useful. Secondly, arm yourself with textbooks. Anything that has ‘Microeconomics’ or even just ‘Economics’ on its cover will be OK for the course of microeconomics, the same holding for management (i.e. any textbook with ‘Management’ on the cover will do). Thirdly, I will do my best to deliver educational content on this blog. Finally, you can smartly use online resources. Wikipedia is just fine: feel free to use it. Search by those keywords I have just given as the formal contents of those two curriculums.

Now, assessment and evaluation. Both curriculums – ‘Microeconomics’ and ‘Principles of Organization and Management’ – end up with an exam. Both exams will consist of two parts: test questions and essay. The scope of each exam will correspond to the same formal contents of each course, which I have just specified. I practice so-called ‘pre-exams’: they are risk-free attempts at the final exam. They have the same contents and the same requirements as the final exam, but you cannot fail, i.e. if you fail at them, the fail grade is not official: you just take the final, formal exam. If, at the pre-exam, you have the very good grade (5,0), you are just done with me for this semester and you have this grade as your final exam grade. If, on the other hand, at the pre-exam you get pass (3,0), or good (4,0), or something in between, like 3,5 or 4,5, you can keep this grade kind of in reserve and try your luck at the regular final exam. I schedule the pre-exams so as to have them at the penultimate (i.e. the one before the last) lecture in each curriculum. That will be January 10th 2018 as regards ‘Principles of Organization and Management’, and January 17th 2018 as for ‘Microeconomics’. In the last lecture of each curriculum, I will discuss the results and contents of the pre-exam.

In the course of ‘Microeconomics’, besides the lectures, you also have workshops (PL: ćwiczenia) with me. They are supposed to be training in the usage of microeconomic theory. Your assessment regarding workshops is based on your activity, which, this semester, I am evaluating on the grounds of your performance in presenting solutions to complex economic problems. What kind of problems, will you ask? Here it comes, an example, I mean. Look outside, through a window, or just look around you in the street. What kind of economic phenomena can change that urban landscape you see? How those changes are likely to occur? You study this problem, you present a complex answer to it in workshops, taking care of using meaningfully that microeconomic theory, and you can have very good for workshops. I will give you such problems to solve in class, on an ad hoc basis, the kind ‘I ask and you respond on the spot’. I will give you such complex mindfucks on this blog, as well, and, finally, you can invent those problems by yourselves. I will report in my notes each case of presenting in class a solution to a complex economic problem, and the student who does it will have points for their final credit in workshops. If you want to have very good (5,0) in workshop credit, solve and present one really complex problem, like the one I have just phrased, or achieve at least 3 successful solutions of ad hoc problems given in class. Each student has to achieve at least a partial solution to a complex problem, or one solution to a simple problem given in class, in order to be credited with a pass (3,0) for workshops. Cases in between will be credited at 3.5, 4.0, or 4.5, accordingly to the demonstrated performance.

Curriculum ‘Undergraduate Thesis Seminar’

Now, I am addressing the students of third year in Undergraduate studies, who chose me as their scientific supervisor and tutor for the writing of their Undergraduate thesis. This curriculum is the most open and the least formal of all, and yet I find it useful to provide some basic principles we will be following. We have two semesters for working together. The end game of this work is your Undergraduate thesis, properly written, positively reviewed, and backed by a successfully passed Undergraduate final exam. This curriculum is supposed to lead you towards this complex goal. These two semesters are slightly distinct, and it is reflected in the assessment procedure. The winter semester ends up, for you, with a dummy credit (i.e. credit or refusal of credit, PL: ZAL <> NZAL). It means you have to do some minimum work in order to consider you eligible for taking the same curriculum in the summer semester 2018. The base for that dummy credit in winter will be the completion of at least 4 reviews of scientific sources suitable for your topic of research. They can be articles or books, but they have to be 4 distinct bibliographic resources thoroughly reviewed. By review, I mean, first of all, a summary of the contents, and secondly, a personal position, from your part, on the points you judge the most important. The purpose of the whole exercise is to develop your skills in working with literature, which is fundamental in the writing of your thesis. In the summer semester 2018, you will be writing your thesis properly spoken, and you will get a scalable credit (PL: ZAO), from 2,0 to 5,0. If you want to get 5,0 (very good) in that second semester, you have to finish writing your thesis, and to convince me, in class, that you can defend it in your Undergraduate final exam, and all that before the end of the summer exam session, i.e. before June 25th, 2018. I think it could be a smart idea to use this blog as a kind of knowledge-bank for your whole group. Just follow along and we will figure something out together.

Curriculum ‘Economic Policy’

Finally, I am addressing the students of 3rd year in Undergraduate studies, regarding the curriculum of ‘Economic Policy’. This is one of your final courses, and it is an integrative one, i.e. we will be combining theory from many fields (mostly economics, but not only). From this point of view, it will be a pre-seminar for you. The formal contents of the course are the following:

Fundamental concepts: you are expected to have a good grasp of economics (mostly macro, but you can do with some micro as well), political sciences and sociology.

Analytical methods: revise your economics and your maths; balance sheets, functions, probabilities and equations will just pop up from under every stone on this path.

Political systems: political players, constitutional orders and partisan orders

Monetary policy: money and monetary systems; the institutional frame for the supply of money; central banks and commercial banks; stability of the monetary system; interest rates; expansionary, restrictive, and neutral monetary policy; exchange rate and the Mundell – Fleming model.

Fiscal policy: the impact of public expenditures and taxes on the economy; the public sector, its internal structure, and its financing; the budget of the government; the distinction between the primary and the structural fiscal balance; automatic stabilizers; public debt and its financing; expansionary, restrictive, and neutral fiscal policy.

Institutional policy: the way governments can use law to influence business and markets; restrictive and liberal legal regimes;

You graduate this course with an essay, of at least 2500 words, which will demonstrate your grasp of the theory I have just specified here-above. As this is an integrative course, you will have to use many resources. There are few textbooks about economic policy in general, and so you are the most likely to compile a small library of your own. Online resources are just fine. I will use this blog to update you, from my part. This course is very much like the work of a journalist: I expect you to get s*** done rather than just learn theory. Do your homework and do your research, write your essay, send it to me via email, improve it according to my remarks, and get rid of me before the exam session comes in winter: this is the drift to follow.

This is all, folks. See you all in class.