Rummaging inside Tesla: my latest exam in Microeconomics

 

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One more educational update on my blog. This time, it is the interpretation of exam in microeconomics, which took place on February 1st, 2019, in two distinct majors of studies, i.e. International Relations, and Management. First, right below, I am presenting the contents of the exam sheet, such as it was distributed to students. Then, further below, I develop an interpretation of possible answers to the questions asked. One preliminary remark is due: the entire exam refers to Tesla Inc. as business case. In my classes of Microeconomics, as well as in those of Management, I usually base the whole semester of teaching on 4 – 6 comprehensive business cases. This time, during the winter semester 2018/2019, one of those cases was Tesla, and the main source material was Tesla’s Annual Report for 2017. The students who attended this precise exam were notified one week earlier that Tesla was the case to revise.

This said, let’s rock. Here comes the exam sheet:

 

Exam in Microeconomics February 1st, 2019

 

Below, you will find a table with selected financial data of Tesla Inc. Use that data, and your knowledge as regards the business model of this firm, to answer the two open questions below the table. Your answer to each of the questions will be graded on a scale from 0 to 3 points. No answer at all, or major mistakes, give you 0 points. Short descriptive answer, not supported logically with calculations, gives 1 point. Elaborate explanation, logically supported with calculations, gives 2 or 3 points, depending on the exhaustiveness of your answer. Points translate into your overall grade as follows: 6 points – 5,0 (very good); 5 points – 4,5 (+good); 4 points – 4,0 (good); 3 points – 3,5 (+pass); 2 points – 3,0 (pass); 0 ÷ 1 points – 2,0 (fail). 

 

 

Values in thousands of USD
Revenues 2017 2016 2015
Automotive sales    8 534 752       5 589 007       3 431 587    
Automotive leasing    1 106 548         761 759         309 386    
Energy generation and storage    1 116 266         181 394          14 477    
Services and other    1 001 185         467 972         290 575    
Total revenues   11 758 751       7 000 132       4 046 025    
Cost of revenues      
Automotive sales    6 724 480       4 268 087       2 639 926    
Automotive leasing      708 224         481 994         183 376    
Energy generation and storage      874 538         178 332          12 287    
Services and other    1 229 022         472 462         286 933    
Total cost of revenues    9 536 264       5 400 875       3 122 522    
Overall total gross profit    2 222 487       1 599 257         923 503    
Gross profit by segments      
Automotive sales 1 810 272 1 320 920 791 661
Automotive leasing 398 324 279 765 126 010
Energy generation and storage 241 728 3 062 2 190
Services and other (227 837) (4 490) 3 642
       
Operating expenses      
Research and development    1 378 073         834 408         717 900    
Selling, general and administrative    2 476 500       1 432 189         922 232    
Total operating expenses    3 854 573       2 266 597       1 640 132    
Loss from operations   (1 632 086)       (667 340)       (716 629)   

 

Question 1 (open): Which operating segment of Tesla generates the greatest value added in absolute terms? Which segment has the greatest margin of value added? How does it change over time? Are differences across operating segments greater or smaller than changes over time in each operating segment separately? How can you possibly explain those phenomena? Suggestion: refer to the theory of Marshallian equilibrium vs the theory of monopoly.

 

Question 2 (open): Calculate the marginal cost of revenue from 2015 to 2017 (i.e. ∆ cost of revenue / ∆ revenue), for the whole business of Tesla, and for each operating segment separately. Use those calculations explicitly to provide a balanced judgment on the following claim: “The ‘Energy and storage’ operating segment at Tesla presents the greatest opportunities for future profit”.  

 

Interpretation

 

Question 1 (open): Which operating segment of Tesla generates the greatest value added in absolute terms? Which segment has the greatest margin of value added? How does it change over time? Are differences across operating segments greater or smaller than changes over time in each operating segment separately? How can you possibly explain those phenomena? Suggestion: refer to the theory of Marshallian equilibrium vs the theory of monopoly.

 

The answer to that question starts with the correct understanding of categories in the source table. Value added can be approximated as gross profit. The latter is the difference between revenues and variable cost, thus between the selling price, and the price of key intermediate goods. This was one of the first theoretical explanations the students were supposed do start their answer with. As I keep repeating in my classes, good science starts with communicable, empirical observation, and thus you need to say specifically how the facts at hand correspond to the theoretical distinctions we hold.

 

As I could see from some of the exam papers that some of my students handed me back, this was the first checkpoint for the understanding of the business model of Tesla. The expression ‘operating segment’ refers to the following four categories from the initial table: automotive sales, automotive leasing, energy generation and storage, and services and other. To my sincere surprise, some of my students thought that component categories of operational costs, namely ‘Research and development’, and ‘Selling, general and administrative’ were those operational segments to study. If, in an exam paper, I saw someone calculating laboriously some kind of margin for those two, I had no other solution but marking the answer with a remark ‘Demonstrable lack of understanding regarding the business model of Tesla’, and that was one of those major mistakes, which disqualified the answer to Question 1, and gave 0 points.

 

In a next step, i.e. after matching the concept of value added with the category of gross profit, and explaining why they do so, students had to calculate the margin of value added. Of course, we are talking the margin of gross profit, or: ‘Gross Profit / Revenues’. Here below, I am presenting a table with the margin of gross profit at Tesla Inc.

 

 

Margin of gross profit 2017 2016 2015
Overall 18,9% 22,8% 22,8%
Automotive sales 21,2% 23,6% 23,1%
Automotive leasing 36,0% 36,7% 40,7%
Energy generation and storage 21,7% 1,7% 15,1%
Services and other -22,8% -1,0% 1,3%

 

There was a little analytical challenge in the phrasing of the question. When I ask whether  ‘differences across operating segments greater or smaller than changes over time in each operating segment separately‘, it is essentially a test for analytical flexibility. The best expected approach that a student could have developed was to use coefficients, like gross margin for automotive sales in 2017 divided by that in 2015, and, alternatively, divided by the gross margin on energy generation and storage etc. Thus, what I expected the most in this part of the answer, was demonstrable understanding that changes over time could be compared to cross-sectional differences with the use of a universal, analytical tool, namely that of proportions expressed as coefficients, like ‘A / B’.

As this particular angle of approach involved a lot of calculations (students could use calculators or smartphones in that exam), one was welcome to take some shortcuts based on empirical observation. Students could write, for example, that ‘The greatest gross profit in absolute terms is generated on automotive sales, thus is seems logical to compare the margin of value added in this segment with other segments…’. Something in those lines. This type of answer gave a clear indication of demonstrable understanding as regards the source data.

As for the theoretical interpretation of those numbers, I openly suggested my students to refer to the theory of Marshallian equilibrium vs the theory of monopoly. Here is how it goes. The margin of value added has two interpretations as regards the market structure. Value added can be what the supplier charges his customers, just because they are willing to accept it, and this is the monopolistic view. As the Austrian school of economics used to state, any market is a monopoly before being a competitive structure. It means that any relations a business can develop with its customers is, first of all, a one on one relation. In most businesses there is at least a small window of price, within which the supplier can charge their customers whatever he wants, and still stay in balance with demand. In clearly monopolistic markets that window can be quite wide.

On the other hand, value added is what the exogenous market equilibriums allow a firm to gain as a margin between the market of their final goods, and that of intermediate goods. This is value added understood as price constraint. Below, I present those two ideas graphically, and I expected my students to force their pens into drawing something similar.

 

Question 2 (open): Calculate the marginal cost of revenue from 2015 to 2017 (i.e. ∆ cost of revenue / ∆ revenue), for the whole business of Tesla, and for each operating segment separately. Use those calculations explicitly to provide a balanced judgment on the following claim: “The ‘Energy and storage’ operating segment at Tesla presents the greatest opportunities for future profit”.  

 

As I reviewed those exam papers, I could see that the concept of marginal change is enormously hard to grasp. It is a pity, as: a) the whole teaching of calculus, at high school, is essentially about marginal change b) the concept of marginal change is one of the theoretical pillars of modern science in general, and it comes straight from grandpa Isaac Newton.

Anyway, what we need, in the first place, is the marginal cost of revenue, from 2015 to 2017, calculated as ‘∆ cost of revenue / ∆ revenue’. The ∆ is, in this case, the difference between values reported in 2017, and those from 2015. The marginal cost of revenue is simply the cost of having one more thousand of dollars in revenue. The corresponding values of marginal cost are given in the table below.

 

Operating segment at Tesla Inc. Marginal cost of revenue from 2015 through 2017
Overall                             0,83
Automotive sales                             0,80
Automotive leasing                             0,66
Energy generation and storage                             0,78
Services and other                             1,33

 

Most of the students who took this exam, on the 1st of February, failed to address the claim phrased in the question, and it was mostly because they apparently did not understand what is the meaning of what they have calculated. Many had those numbers right, although some were overly zealous and calculated the marginal cost for two windows in time separately: 2015 – 2016, and then 2016 – 2017. I asked specifically to jump from 2015 straight into 2017. Still, the real struggle was the unit of measurement. I saw many papers, whose authors transformed those numbers – correctly calculated – into percentages. Now, look people. In the source table, you have data in thousands of dollars, right? A delta of $000 is given in $000, right? A coefficient made of two such deltas is still in $000. Those numbers mean that if you want to have one more thousand of them US dollars in revenues, at Tesla Inc., you need to spend $830 in cost of revenue, and correspondingly for particular operating segments.

Thus, when anyone wrote those marginal values as percentages, I was very sorry to give that answer a mention ‘Demonstrable lack of understanding regarding the concept of marginal cost’.

When considering the marginal cost of revenue as an estimation of future profits, the lower it is, the greater profit we can generate. With a given price, the lower the cost, the greater the profit margin. The operating segment labelled ‘Energy generation and storage’ doesn’t look bad at all, in that respect, certainly better than them ‘Services and other’, still it is the segment of ‘Automotive leasing’ that yields the lowest marginal cost of revenues. Thus, the claim “The ‘Energy and storage’ operating segment at Tesla presents the greatest opportunities for future profit” is false, as seen from this perspective.

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?

 

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?

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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.

Quite abundant a walk of life

My editorial

I have just finished writing an article about the link between energy and human settlement. You could have noticed that I have been kind of absent from scientific blogging for a few days. I had my classes starting, at the university, and this was the first reason, but the second one was precisely that article. On Wednesday, I started doing some calculations, well in the lines of that latest line of my research (you can look up ‘Core and periphery’ ). Nothing very serious, just some casual dabbling with numbers. You know, when you are an economist, you start having cold turkey symptoms when you are parted with an Excel spreadsheet. From time to time, you just need to do some calculations, and so I was doing when, suddenly, those numbers started making sense. It is a peculiar feeling when numbers start making sense, because usually, you just kind of feel that sense but you don’t exactly know what it actually is. That was exactly my case, on Wednesday. I started playing with the parameters of that general equilibrium, with population size on the left side of the equation, and energy use, as well as food intake, on the other side. All of a sudden, that theoretical equilibrium started yielding real, robust, local equilibria in individual countries. Then, something just fired off in my mind. My internal happy bulldog, you know, that little beast who just loves biting into big, juicy loafs of data, really bit in. My internal ape, that curious and slightly impolite part of me, went to force the bulldog’s jaws open, but it got fascinated. My internal austere monk, that really-frontal-cortex guy inside of me, who walks around with the Ockham’s razor ready to slash into bullshit, had to settle the matters. He said: ‘Good, folks, as you are, we need to hatch an article, and we do it know’. You don’t discuss with a guy who has a big razor, and so all of me wrote this article. Literally all of me. It was the first time, since I was 22 (bloody long ago), that I spent a night awake, writing. The result, for the moment in the pre-editorial form, is entitled ‘Settlement by energy – can renewable energies sustain our civilisation?’  and you can read it just by clicking this link.

Anyway, now I am in a post-article frame of mind, which means I need to shake it off a bit. What I usually do in terms of shaking off is having conversations with dead people. No, I don’t need candles. One of my favourite and not-quite-alive-anymore interlocutors is Jacques Savary, a merchant and public officer, who, in 1675, two years after both the real and the fictional d’Artagnan had been dead, published, with the privilege of the King, and through the industrious efforts of the publishing house run by Louis Billaine, located at the Second Pillar of the Grand Salle of the Palace, at Grand Cesar, a book entitled, originally, ‘Le Parfait Négociant ou Instruction Générale Pour Ce Qui Regarde Le Commerce’. In English, that would be ‘The Perfect Merchant or General Instructions as Regards Commerce’. And so I am summoning Master Savary from the after world of social sciences, and we start chatting about what he wrote regarding manufactures (Book II, Chapter XLV and XLVI). First, a light stroke of brush to paint the general landscape. Back in the days, in the second half of the 17th century, manufactures meant mostly textile and garments. There was some industrial activity in other goods (glass, tapestry), but the bulk of industry was about cloth, in many forms. People at the time were really inventive as it came to new types of cloth: they experimented with mixing cotton, wool and silk, in various proportions, and they experimented with dyeing (I mean, they experimented with dying, as well, but we do it all the time), and they had fashions. Anyway, textile and garment was THE industry.

As Master Savary starts his exposition about manufactures, he opens up with a warning: manufactures can lead you to ruin. Interesting opening for an instruction. The question is why? Or rather, how? I mean, how could a manufacturing business lead to ruin? Well, back in the day, in 17th century, in Europe, manufacturing activities used to be quite separated institutionally from the circulation of big money. Really big business was being done mostly in trade, and large-scale manufacturing was seen as kind of odd. In trade, merchants of the time devised various legal tools to speed up the circulation of capital. Bills of exchange, maritime insurance, tax farming – it all allowed, with just the right people to know, a really smooth flow of money, even in the presence of many-year-long maritime commercial trips. In manufacturing, many of those clever tricks didn’t work, or at least didn’t work yet. They had to wait, those people, some 200 years before manufacturing would become really smooth a way of circulating capital. Anyway, putting money in manufacturing meant that you could not recover it as quickly as you could in trade. Basically, when you invested in manufactures, you were much more dependent on the actual marketability of your actual products than you were in trade. Thus, many merchants, Master Savary obviously included, perceived manufacturing as terribly risky.

What did he recommend in the presence of such dire risk? First of all, he advised to distinguish between three strategies. One, imitate a foreign manufacture. Second, invent something new and set a new manufacture. Third, invest in ‘an already established Manufacture, whose merchandise has an ordinary course in the Kingdom as well as in foreign Countries, by the general consent of all the people who had recognized its goodness, in the use of fabric which have been manufactured there’. I tried to translate literally the phrasing of the last strategy, in order to highlight the key points of the corresponding business plan. An established manufacture meant, first of all, the one with ‘an ordinary course in the Kingdom as well as in foreign Countries’. Ordinary course meant a predictable final selling price. As a matter of fact, this is my problem with that translation. Master Savary originally used the French expression: ‘cours ordinaire’, which, in English, becomes ambiguous. First, it can mean ‘ordinary course’, i.e. something like an established channel of distribution. Still, it can also mean ‘ordinary rate of exchange’. Why ‘rate of exchange’? We are some 150 years before the development of modern, standardized monetary systems. We are even some 100 years before the appearance of paper money. There were coins, and there was a s***load of other things you could exchange your goods against. At Master Savary’s time, many things were currencies. In business, you traded your goods against various types of coins, you accepted bills of exchange instead of coins, you traded against gold and silver in ingots, as well, and finally, you did barter. Some young, rich, and spoilt marquis had lost some of its estates by playing cards, he signed some papers, and here you are, with the guy who wants to buy your entire stock of woollen garments and who wants to pay you precisely with those papers signed by the young marquis. If you were doing really big business, none of your goods has one price: instead, they all had complex exchange rates against other valuables. Trading goods with what Master Savary originally called ‘cours ordinaire’ meant that the goods in question were kind of predictable as for their exchange rate against anything else in that economic jungle of the late 17th century.

What worked on the selling side, had to work on the supply side as well. You had to buy your raw materials, your transport, your labour etc. at complex exchange rates, and not at those nice, tame, clearly cut prices in one definite currency. Making the right match between exchange rates achieved when purchasing things, and those practiced at the end of the value chain was an art, and frequently a pain in your ass. In other words, business in 17th century was very much like what we would have now if our banking and monetary systems collapsed. Yes, baby, them bankers are mean and abjectly rich, but they keep that wheel spinning smoothly, and you don’t have to deal with Somalian pirates in order to buy from them some drugs, which you are going to exchange against natural oil in Yemen, which, in turn, you will use to back some bills of exchange, which will allow you to buy cotton for your factory.

Now, let’s return to what Master Savary had to say about those three strategies for manufacturing. As he discusses the first one – imitating a foreign factory – he recommends five wise things to do. One, check if you can achieve exactly the same quality of fabric as those bloody foreigners do. If you cannot, there is no point in starting imitation. Two, make sure you can acquire your raw materials, in the necessary bracket of quality, in the place where you locate your manufacture. Three, make sure the place where you locate your operations will allow you to practice prices competitive as compared to those foreign goods you are imitating. Four, create for yourself conditions for experimenting with your product and your business. Launch some kind of test missiles in many directions, present your fabrics to many potential customers. In other words, take your time, bite your ambition, suck ass and make your way into the market step by step. Five, arrange for acquiring the same tools, and even the same people that work in those foreign manufactures. Today, we would say: acquire the technology, both the formal, and the informal one.

As he passes to discussing the second strategy, namely inventing something new, Master Savary recommends even more prudence, and, in the same time, he pulls open a bit the veil of discretion regarding his own life, and confesses that he, in person, had invented three new fabrics during his business career: a thick woollen ribbon made of camel wool, a thick drugget for making simple, coarse, work clothes, and finally a ribbon made of woven gold and silver. Interesting. Here is a guy, who started his professional life as a merchant, then he went into commercial arbitrage for some time, then he went into the service of a rich aristocrat ( see ‘Comes the time, comes the calm duke’ ), then he entered into a panel of experts commissioned by Louis XIV, the Sun King, to prepare new business law, and in the meantime he invented decorative ribbons for rich people, as well as coarse fabrics for poor people. Quite abundant a walk of life. As I am reading the account of his textile inventions, he seems to be the most attached to, and the most vocal about that last one, the gold and silver ribbon. He insists that nobody before him had ever succeeded in weaving gold and silver into something wearable. He describes in detail all the technological nuances, like for example preventing the chipping off of the very thinly pulled, thread size, golden wire. He concludes: ‘I have given my own example, in order to make those young people, who want to invent new Manufactures, understand they should take their precautions, not to engage imprudently and not to let themselves being carried away by the profits they will make on their first fabrics, and to have a great number of them fabricated, before being certain they will be pleasant to the public, as well as for their beauty as for quality; for it is really dangerous, and they will risk their fortune at it’.

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.