ownership levels half those of western Europe; laws that made the labour market
flexible; reduced corporate and income taxes; an existing network of suppliers (expected to expand further); and membership of the EU. As Volkswagen already produces cars in Slovakia (Bratislava; 238,000 cars in 2006), this ‘tiny’ (5.4 million people) central European country is becoming one of the European motor giants.
The three Slovak car plants could produce over 550,000 cars a year from 2006, making it the highest per capita car production in the world (see also R. Anderson and J. Cienski, ‘Hyundai picks Slovakia for new Є700m car assembly plant’, Financial Times, 3 March 2004).
Slovakia may produce about 900,000 cars a year from 2008. The automotive industry contributes a quarter to the manufacturing output and a third to exports (this will increase to a half once the two plants are completed). The problem may be in the increasing imbalance in the Slovak industrial structure. Although Slovakia may be the victim of its own success, some of the neighbouring countries (Poland, for example) might have preferred to be faced with such ‘troubles’ than to lose out to Slovakia.
A looming problem in the central and east European countries is an increase in wages above the improvements in productivity. Having joined the EU, workers in the new member countries want to achieve the ‘old’ EU(15) living standards as soon as possible. This will jeopardise the central and east European countries’
attraction on account of their relatively low wages. Such an improvement may take a decade, or even a generation, to accomplish.
Similarly, the mobile phone producers such as Motorola or Nokia started
production in India in 2005, not only because of lower costs of operation, but also because of a rapidly expanding market for mobile phones in this country. India had 52 million mobile phone subscribers in 2005, and this is expected to expand to more than 300 million in 2009 (J. Johnson, ‘Back to the future: India is gaining belated credibility as an emergent export titan’, Financial Times,30 November 2005).
34 The six world-leading clusters that have more than 5,000 researchers in their area of competence and that are worthy of decisive government funding are: neurosciences and complex systems (Ile-de-France); aeronautics (Toulouse); space (Bordeaux); health (Lyons);
nanotechnology (Grenoble); and secure communication systems (Provence-Alpes-Côte d’Azur) (P. Hollinger, ‘France identifies six target areas of growth’, Financial Times, 13 July 2005).
35 The other one relates to services.
36 Alchian (1950) considered, among other issues, the role of chance and luck in achieving economic success.
37 Certain lawyers may have similar expertise and talent. But a small difference in the knowledge and experience of the ‘right’ lawyer and his/her choice (tipping point) by a party in a legal process may bring a crucial difference in the result of a legal case. Therefore, if one prefers averages together with stability and does not go for or select extremes, one may have a relatively steady life, but may at the same time forget about economic rents (supernormal profit).
38 Risk is a situation in which one may ascertain and calculate possible outcomes with a reasonable degree of probability. Hence, most often an insurance market will appear. Risk may be spread among those who are willing to share it and bear it (the reinsurance market).
Risk could be also passed on from those who know more about it to those who know less
about it. Uncertainty is an irresolvable situation in which it is impossible to establish either all the possible outcomes or the probability of reaching the known outcomes. One may insure against certain risks, but not against uncertainty. Uncertainties may arise in instances such as relations between buyers and suppliers; between labour and management; between the public and private sectors; between current and future technology … Some of these uncertainties may be sometimes mitigated or, from time to time, even resolved through institutions, i. e. formal and informal conventions.
39 If markets are so efficient, why are there more Ferraris on the streets of Monaco than on the streets of Marseilles or Nairobi?
40 The convergence hypothesis may find some support in certain sub- and crosssectional samples; however, it lacks unconditional and general empirical support.
41 Economic rents refer to the proceeds of the producers and exporters in excess of what is necessary to cover the costs of production and trade, and to yield an average return on investment. These rents represent supernormal profits that are returns to scarcities such as unique capabilities of firms or individuals. Rents are due to barriers to entry such as large sunk costs, economies of scale, externalities, advertising, regulatory policies, distribution and service networks, asymmetric information (adverse selection), as well as consumer loyalty to a certain brand or a person (a singer, actor or sportsman).
42 Léon Walras (1834–1910) dearly wanted to enter the prestigious French École polytechique.
As his mathematical proficiency was insufficient, he was rejected twice. He ended up at a mining school, but did not have success as an engineer. Later he tried his luck as a novelist and art critic, but to no avail. Then, a depressed Léon talked to his father, Auguste Walras, an economist, about what to do next in life. His father, a schoolmate of the famous French economist Augustine Cournot and a schoolmaster, told Léon during a walk in 1858 that economics needed to be based on a scientific theory.
43 In 1893 Walras selected Wilfredo Pareto (1848–1923) to take over his chair at the Lausanne School of Economics. Pareto was, like Walras, trained as an engineer and worked for railways in Italy. He later developed an interest in economics. As a late bloomer in economics, Pareto published his magnum opus Manual of Political Economy (1906) that took him forever out of Walras’ shadow. All economists learn that the Pareto optimal equilibrium point is a situation in which no one can make a move without making someone else worse off. This is the finest social outcome in a free society and Walras’ world of complete information. An evolutionary economy is Pareto sub-optimal as it is in constant disequilibrium.
44 A bad sign in a company is if everyone on the executive board has grey hair. It is equally bad when nobody does (as was the case with many dot-coms that went bust during 1990s) (Beinhocker, 2006, p. 361).
45 It took Brian Arthur six years and fourteen rewrites of his working paper ‘Competing technologies, increasing returns and lock-in by historical events’ before it was published by The Economic Journal in 1989 (‘From QWERTY to Microsoft’, Options (IIASA), winter 2007, p. 20).
46 A scientific law is a set of proposals that specifies conditions for a certain result. If the conditions are met, the result will occur.
47 But is economics about scarcity and diminishing returns? Are there balancing forces of abundance? What about people, knowledge, ideas, labour, capital and technology?
48 Entropy is a state of disorder, confusion and disorganisation.
49 Aerobic organisms transform oxygen into carbon dioxide, while plants do the reverse.
Human activity in transport and production emits extra carbon dioxide into the atmosphere that potentially has an impact on the change in climate and the environment as plants cannot always process this ‘extra’ in time.
50 Capital–labour ratio determines relative returns between two factors of production. Political changes and economic liberalisation from the early 1990s brought the entry into the ‘global’
economy of the emerging economies such as China, India, Brazil and Russia with their huge labour force (and relatively little capital per worker). Their functional integration with the global production, investment and trading system shifted the worldwide capital–labour ratio in favour of capital (and against labour). The ‘world labour force’ doubled.
51 This view of the turbulent, as opposed to moderate, smooth and gradual, character of changes makes Schumpeter closer to Marx than to neoclassical economists.
52 For example, firms may be of different size and may employ different technology and business strategies. Certain players may have a highly ambiguous and vague purpose such as research institutes and universities, while others, such as firms, may have moderately ambiguous goals such as earning profit.
53 This was the case in all countries in different stages of their development. Even today in the most ‘liberal’ market countries the most advanced technologies have been developed with substantial and continuous assistance from the government. There are broad and strong reasons for the government to assist in the general R&D process over and beyond the level available through a pure and free-market system. Unassisted markets may not be the best economic guides in situations with a lot of risk and uncertainty. But this does not give either carte blanche for a full-blown intervention by the state authorities.
54 Lumpiness (indivisibility) presents a kind of a bottleneck in a smooth production and geographical space. Many products are often lumpy, as one cannot make money from only a half of them. Examples include: an electric bulb, a radio signal, a bridge, a TV set, a mobile phone or national defence.
55 ‘equilibrium if it exists at all, is not unique and historical accidents matter’ (Lipsey et al.
2005, p. 41).
56 Regarding the appearance of occasional turmoil in financial markets and hard econometric models, here comes an instructive view:
A glance at recent financial history shows that this type of ‘rare’ event is not so unusual at all. Back in 1998, for example, a key reason for the nearimplosion of Long Term Capital Management was that the fund’s economic whizzkids who included some Nobel prize-winning economists had devised model-based trading strategies that turned sour when markets moved in unforeseen ways …
‘People say these are one-in-a-100,000-years events but they seem to happen every year,’ says Satyajit Das, a consultant to hedge funds and investment banks. ‘This episode should make people ask questions about models I think it could lead to a real reassessment’…
Consequently, the lesson that some bankers and policymakers may yet draw from this month’s events is arguably the simplest: namely that it could be time to reinsert humans into the trading process. One way to do this would be to improve risk management functions; another key step is to ensure that banks have the ability to switch off the models during times of stress. ‘Anyone using a human brain, rather than algorithms, could have made money in recent days in the equity markets,’
chuckles one banker. One unexpected winner from
this month’s market turmoil, in other words, may be a newfound appreciation of human intuition and old-fashioned common sense.
(G. Tett and A. Gangahar, ‘Why computer models proved unequal to market turmoil’, Financial Times, 14 August 2007)
Friedrich Hayek once said that he knew few people who had made money from acting on economic forecasts, but a good many who had made it from selling them.
It is difficult for those in any profession to stand out against the spirit of the times.
(S. Brittan, ‘It is time to jettison the forecasts’, Financial Times, 20 December 2007) 57 Just as a reminder, fixed costs deal with minimum outlays that are necessary to start a
business; these are all costs before the first piece can be sold (machines, shelter, energy, permissions, material, publicity … ). Variable costs change (rise and fall) in proportion with the volume of output (materials, energy, labour). Average costs are the sum of all fixed and variable costs divided by the total quantity of output. Marginal cost is the cost of producing the last or the most recent unit of product. Opportunity cost is what you missed by not doing something else.
58 Murphy et al. (1989) discussed multiple equilibria with respect to the process of industrialisation, postulating that a certain critical mass of industries may have to be involved in order for industrialisation to be successful. A parallel could be drawn with location theory, and a role for government policy to aid the ‘takeoff’ of a particular location, and encourage firms to move to that location.
59 The coordination problem may be illustrated with the example of the small village of Palanpur in rural India.
Palanpur farmers sow their winter crops several weeks after the date at which yields would be maximized. The farmers do not doubt that earlier planting would give them larger harvest, but no one, the farmer explained, is willing to be the first to plant, as the seeds on any one plot would be quickly eaten by birds. I asked if a large group of farmers, perhaps relatives, had ever agreed to sow earlier, all planting on the same day to minimize the losses. ‘If we knew how to do that,’ he said, looking up from his hoe at me, ‘we would not be poor.’
(Bowles, 2004, p. 24) The solution of the coordination problem (through rewards for cooperation and a system of sanctions for cheaters) may be effective if the number of repeated rounds of play is infinite. Cooperation may mean a positive sum game for each player as uncertainties may be reduced to a manageable level. It may be much harder to elicit such cooperation if the envisaged number of rounds is finite, e.g. four rounds or the lifetime of each player (finite, but unknown).
60 Positive feedback economics (increasing returns) may also find parallels in nonlinear physics. For example, ferromagnetic materials consist of mutually reinforcing elements.
Small perturbations, at critical times, influence which outcome is selected (bifurcation point), and the chosen outcome may have higher energy (that is, be less favourable) than other possible end states (Arthur, 1990a, p. 99).
Another example of these mutually reinforcing links that accelerate changes moving the system away from equilibrium is when a microphone is too close to a loudspeaker. Sound bounces back between the microphone and loudspeaker and amplifies itself. Or: the more operating telephones there are in the world, the more useful they potentially become to everyone. The higher the consumer confidence
, the higher the expenditure: this translates into higher employment
which increases income, which in turn stimulates consumer confidence.
A negative feedback effect has opposite effects from the ones just described. If a change happens, negative feedback forces drag the system back towards the starting or desired (equilibrium) point. When temperature in a boiler falls below the adjusted level, a thermostat turns on a heater to raise the temperature until it reaches the desired level, at which it switches itself off.
61 Veblen referred to a similar problem in 1915 when he wrote about the undersized rail wagons in Britain. ‘All this does not mean that the British have sinned against the canons of technology. It is only that they are paying the penalty for having been thrown into the lead and so having shown the way’ (Veblen, 2003, p. 53). Later on Germany came along and used ‘the English technological lore’ (p. 53) in a superior way. The Germans were able to start from a relatively clean technological account. They were not locked into this technology, like the British.
62 The Dvorak keyboard may be seen at many www sites. For example:
http://www.tifaq.com/keyboards/dvorak-keyboards.html (accessed on 8 January 2008).
63 Sony expected that its reputation and favourable opinions by the experts about Betamax were just enough to impose this standard and to capture the consumer market. Sony came into the market first, and expected that people would primarily use camcorders to make home movies (birthday parties, weddings, family reunions, holidays … ). Sony was wrong. VHS (JVC) had one important advantage over Betamax: its longer playing time. VHS devices filled homes, chiefly for watching pre-recorded films. For this Betamax was inferior. The market referendum made Sony abandon Betamax.
64 Even though it was user-unfriendly, DOS initially succeeded on the market over Macintosh because of the following merits. First, it was cheaper. Second, it was easier to create programs for DOS computers than for Macintosh, which had copy-protected programs;
diskettes had to be kept in the computer so only one program could run. Third, DOS updates on the screen were instantaneous, while Macintosh users had to wait a while for changes to appear on the screen. However, the switch from DOS to Windows was rather quick in the early 1990s. Even though it was costly, the advantages of the new system were so great that they more than compensated for the trouble.
65 J. Chaffin, ‘Warner plumps for Blu-ray in format wars’, Financial Times,4 January 2008;
‘Betamax’s revenge’, Financial Times, 7 January 2008.
66 This agglomeration potential and advantage is highest in the early days of the existence of a technology or a product. As some inputs or parts of technology become standardised over time, this initial agglomeration potential and advantage fades away.
67 The British cotton textile industry in Lancashire, successful in the nineteenth century, fell victim to the rise of the same industry in the US and Asia during the twentieth century.
In this and many other cases, the primary cause of decline is the inability or slowness of a region’s industries to respond to the rise of major new competitors and technologies elsewhere. According to the path dependence model, external shocks of this sort should eventually stimulate a region’s economy to ‘break free’
from its ‘locked-in’ path of development and move to another, more competitive configuration. Instead, however, as many examples testify, such shocks may merely set of a spiral of negative ‘lock-in’ effects whereby the region’s firms react in terms of defensive cost-cutting and quality reduction rather than by innovative investment or moving into new productive fields, so that it is not simply a lack of change that is the problem. In such cases of interregional competitive exclusion and
‘lock-out’, the occurrence of crisis and loss of competitiveness can be a gradual
process extending over several decades rather than a dramatic collapse and reconfiguration during critical juncture
.
(Martin and Sunley, 2006, p. 417) 68 Akron (Ohio) was famous worldwide for its tyre-making. Goodyear, Firestone, BF Goodrich,
General Tire and Uniroyal once all had their head office in Akron. The location of tyre-making in this industrial town was quite favourable as it was just two hours’ drive from Detroit. However, tyre-making was transferred during the 1970s to lower-cost locations in the southern part of the US. In addition, firms wanted to get rid of the sometimes rigid trade unions that were strong in the north. Even though this was a serious blow to the economy of the Akron area, the location reinvented and upgraded itself in a related field of polymer engineering and production.
69 An ergodic system (a pendulum; water in a glass [if it is not spilled out] on a table) ultimately returns to its original steady state, regardless of the disturbances between the starting and ending points in time. This system cannot shake free of its history and yields a path-dependent outcome. Put loosely, the system is predictable. However, for predictions about the future of a non-ergodic system one ought to have certain information and knowledge about its past.
70 This hypersensitivity to small events makes the mathematical model (equations) impractical for predictions about the future behaviour. The problem is too complicated. Nonetheless, fathoming facts on how the system behaves and operates may be a great and useful achievement in itself.
71 M. Wolf, ‘The lessons Asians learnt from their financial crisis’, Financial Times, 23 May 2007.
72 http://www.lkwdpl.org/WIHOHIO/oakl-ann.htm (accessed on 8 January 2008).
73 There were no strong a priori reasons why Britain selected the left side of the road for driving while the European continent and the US chose the right. But they did. Other countries opted for the side of either their closest neighbour or their colonial master. Path dependency captured the rest. Once this locks in, it is costly and perhaps hazardous to change.
74 Finland was a resource-based (depended) economy. Within a relatively short period of time,
74 Finland was a resource-based (depended) economy. Within a relatively short period of time,