Somalia was ruled by Marxists from 1976 until the civil war and collapse of the state –  run by the Somali Revolutionary Socialist Party politburo. Since that time Somalia has been a stateless society.

The progressive left often relishes destroying strawman version of libertarianism by pointing to a country destroyed by a bunch of socialist “experts” who thought they knew how to run other people’s lives better than people themselves could – former communist country, Somalia. Somalia, to them, is an example of what it would be like to live in “libertopia”.

I am not an anarchist by any stretch of imagination. But I found this article quite interesting, especially, coming from BBC of all places.

The main markets of the Somali capital, Mogadishu, are busy places, giving the impression that business is brisk.

It is not just the daily needs of food and clothing that are available. The latest electronic gadgets can also be bought.

What would somali’s do without an FCC to allocate spectrum to their favorite cronies?

The business success story of the last 20 years has been the growth of the mobile telecommunications sector.

Somali telecoms expert Ahmed Farah says the first mobile telephone mast went up in Somalia in 1994, and now someone can make a mobile call from anywhere in the country.

Of course, there are always young men with large guns in many of these images of Somalia. I have never been to Somalia, so I don’t know how pervasive this phenomenon is. However, if this were a dictatorship, with young men in uniform carrying those guns, somehow people feel better than they would from seeing men without uniform carrying similar weaponry.

Somalia is no paradise, neither are most of the countries in the continent of Africa. It wouldn’t be fair to compare Somalia to those of the West, but compared to it neighbours, I would say Somalia is doing alright, and  may be much better than most.

Further Reference:

Stateless in Somalia – Ben Powell

Somalia after State Collapse: Chaos or Improvement ( working paper )

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I have been meaning to pursue blogging for a while now. More than a year ago I setup this website specifically with that in mind. Until recently, I had all the excuses in the world for not doing it more often. I could do a great job of convincing anyone, most importantly me, as to why I just could not find the time to do this. Well, I hope it changes now. Here are a few reasons why I wanted to blog in the first place.

1. Writing my thoughts down or trying to communicate in a way that clarifies the subject matter to me and others forces me to think more deeply.
2. My thoughts will exist for my own future reference.
3. Many times when I read something, I get a vague recollection of something I had seen or read in the past. It usually frustrates me when I cannot place exactly when, where or how. This way, at least, some of these ideas could be searched or referenced again in the future.
4. There is no better way to get good at something than to just do it, and do it often – in this case writing.
5. Pressure of peer/public review makes me do that extra diligence.

It is not exhaustive a list, but it’s a start

A Keynesian economist is like a doctor who prescribes blood transfusion from the left hand to the right hand of a patient, regardless of what afflicts the patient. If patient doesn’t recover, it is always because transfusion wasn’t big enough.

How many Keynesians does it take to change the light bulb? Keynesians don’t change light bulbs, they are busy breaking good light bulbs to stimulate the economy.

After an interesting first class of the mandatory macroeconomic course, I left the classroom with a lot on mind. I have very little time develop these thoughts, or to put them into words. As I had guessed upon receiving the syllabus, the professor is a follower of what could be generally termed as Keynesian economics. She seemed reasonable and open to ideas contrary to hers. Let me make this clear, the reason I am taking this course is because I am open minded to ideas.

I am not going list all the ideas that I found agreeable. What would be the point of it? I am not even going to spend time trying to prove my professor wrong on every single point on which I find myself in disagreement. That will be too arrogant on my part; after all, this is just my first formal macroeconomics class ever. I am trying to find ways to understand the other side. I am just going to focus on one particular topic – inflation versus deflation.

About 10 minutes into the session, the professor asked a vague question – if one had to pick between inflation and deflation, what should he/she choose? I answered deflation. Now, I know in most recessions price levels fall. However, the question remains – what is wrong with falling prices in general, not under some specific abnormal situation?

I received all the answers I have already heard from other experts who fear a bogeyman called falling prices: people will delay purchases as they wait for prices to fall, aggregate demand will fall, servicing debt will become more burdensome – this last part that I agree with, but why should policy favor debtors as opposed to savers? I pointed out that most technology products have experienced falling prices for as long as had them. The response I heard from the students and professor was – it is just one sector of a large economy, and it is still bad when the overall price level declines – even a slow, steady rate of decline (fraction of a percentage), as was clear from professor’s explanation of the logic behind Fed’s target interest rates.

I argued that whole of 19th century, in the U.S., prices fell steadily, yet the economy went through a phenomenal growth period known popularly as the industrial revolution. Professor was not buying it. So I decided to dig up some data at measuringworth.org (granted, data is not that great for period prior to 1930s), and here is what I found:

“$66.00 in the year 1900 has the same “purchase power” as $100 in the year 1801.”

So it is clear that prices declined for a whole century, but what happened to GDP?

Real GDP went up from about 7.75 billion (2005 dollars) to 422 billion, an astonishing growth of about 5400%, a lot more than 2300% growth experienced in the 20th century.


Figure 1 (source: econlib.org)

Later on, professor went on to explain Phillips Curve(figure 1) that purportedly showed inverse relationship between inflation and unemployment. In other words, lower unemployment will cause employers to bid up the wages of the scarce labor, thereby causing rate of inflation to rise. Similarly, high rate of unemployment will push down wages and therefore the rate of inflation. Sounds good, but it is not that simple! A fully employed growing economy with high productivity also produces a lot more goods than it would otherwise, so the wages(income) compete for a lot more consumer goods. Why would there be a general rise in prices unless there is a faster growth in money supply than the rate of growth in output?

Here is a chart I found in a recent St. Louis Fed report(Figure2) which just proves my point – there is no evidence of a relationship between inflation and unemployment.


Figure 2 – (Click on the image for a sharper view.)

It looks pretty clear to me that deflation is not the monster that many mainstream economists make it to be. Of course, there are always exceptions but that applies also to argument in favor of a steady rate of inflation.

I have a few other thoughts on that class, but I will save them for another time.

Back in winter of 2010, I took a mandatory MBA course on public policy, ethics and social responsibility. The professor had a very interesting format for her class with high emphasis on class participation which made the course extremely interesting for the students. I challenged the professor and the rest of my classmates like they probably never ever had experienced before(and probably after); at least, the professor told me as much at the end of the course. I was worried about my grade, but I just could not stop me from speaking my mind, when I was mostly a lone voice with opposing point of view. She turned out to be a very fair evaluator and gave me an A. She allowed me to speak my mind and for that I applaud the professor.

In academia, especially non-economic, non-finance social subjects are filled with good intentioned social engineers who wants to design society and control people’s lives for people’s own good. Besides I live in the Bay Area and certain groupthink goes with the territory.

So why am I thinking about this now? Well, I signed up for ECON 405 – Macroeconomics. Look what the professor has assigned for reading in addition to the text book: “I recommend you read Krugman book as soon as possible – it provides a good overview of macroeconomic issues and is written in an engaging, easy to read style. Be sure you don’t get an older version of the book written before the 2008 crisis. (Chapter 2 & 4 on Latin America and Asia are not required.) The workload gets heavier as the course progresses, so it is helpful to read this book early on.”

I still have the same concerns I had when I started my ethics & social responsibility course. But this time I have more stacked against me – I am not an economist. While I have read few economic papers and books, my knowledge on these matters are still raw, and possibly can’t argue technical matters the way I could on more philosophical ones. Nonetheless, I’m looking forward to this course, and I walking in with open mind, and with the hope that this course will help me clarify some of the claims of Keynesian economics that, to me, are patently absurd.

Momentum in business, and in life, is like a spiral – when you are on the way up, it seems like nothing could ever stop you, and on the way down, it’s feels the same way. Something very often comes in the way to stop you in your tracks, sometimes soon, and other times late. The one who could do no wrong on the way up, can not get anything right on the way down, and vice versa! To put it in the context of a business, when stock price starts stagnating for some inexplicable reason, suddenly employee retention becomes a problem, and spiral suddenly changes direction 180 degrees.

It would be fun riding on that upward spiral, I imagine; an end to that run would be the last thing on that fortunate person’s mind – almost impossible if he/she cared to think about it. On the other hand, riding a downward spiral would be no fun at all, and, I would argue, that a desperate hope for its end would be that unfortunate person’s obsession. Often, they are not two different persons but the same one at different periods in life.

I’ve been reading a lot of Taleb and wondering about those spirals of life. With a few more stats courses under my belt, I have better appreciation for Nassim Taleb’s work – Fooled by Randomness. Yes, I am reading it a second time, after a long hiatus.

If there is one thing to take away from Taleb’s work, it is to stop pretending to be privy to any such special knowledge of the future, such as when the stars will align in your favor and when they will not.

Barnes & Noble has been in the news lately because of the buyout offer from John Malone circling around. Within few days of John Malone’s offer, Ron Burkle, a major shareholder in BN announced that he grabbed another 603,000 shares of BN at $18.49, a price that already reflects the price surge after the Malone offer. So why should Microsoft enter the bidding war?

1. Barnes & Noble has over 700 stores worldwide and over 600 college bookstores. These books stores are a great showroom for Microsoft’s array of software, gaming & partner made hardware products. Some of these stores may not be ideally located for Microsoft’s store strategy, and in those cases, Microsoft should just sell the location. Large stores, especially in upscale downtown locations or inside major shopping malls should be attractive to Microsoft.

2. Barnes & Noble, just yesterday, announced the new Nook ebook reader. As stated earlier, it is very promising new product. Even the “older” color screen version of the nook has been a hit product. Granted, the color nook runs Android. It’ll not be hard for Microsoft ride the success of nook while preparing to transition the product to something that runs a version of Windows CE kernel.

3. Barnes & Noble sells traditional paper books and, increasingly, the electronic version. Microsoft as a technology company is investing heavily in its online division to compete with Google. This is another way for Microsoft to ensure that they make their presence felt not just in search and related services, but creating valuable information content in its cloud services.

Following is a paper I submitted on March 18, 2010 to my professor of  Corporate Social Responsibility course @ SCU( I received an A grade for the course) :

“For every complex problem there is an answer that is clear, simple, and wrong.” – H.L Mencken

As an engineer working in the technology industry, my job function and responsibilities are mainly in the area of software product testing. While I am neither an employee of Toyota, nor an employee of any other automobile company, as a Software QA Team Lead, I feel that this topic is very relevant to my day to day work, for the simple reason that Toyota’s recent troubles allegedly stems from some electronic components inside the accelerator/braking system, a defect that was supposedly not caught in their quality tests. This case has a lot of relevance to the kind of decisions that quality personnel have to make on a regular basis.  Furthermore, this is a hotly debated topic in the public policy arena at the moment.

My goal in this paper is to demonstrate the potential repercussions of a populist crusade against genuinely good businesses – a perspective rarely considered by ethicists in their enthusiasm to bring down a corporation because of situations with mere appearance of impropriety.

The Toyota Way

Toyota started in 1933 as a division of Toyoda Automatic Loom Works devoted to the production of automobiles under the direction of the founder’s son, Kiichiro Toyoda. Its first vehicle, passenger cars A1 and G1, rolled out in 1935. The independent Toyota Motor Co. was established in 1937.

In recent years, Toyota had grown into the single largest manufacturer of passenger cars in the world, overtaking GM. Some of Toyota’s sedans like the Camry have outsold most all others in the United States for several years. Over the years, Toyota has earned the reputation as the maker of some of the most reliable, durable, and safe automobiles in the world.

In April 2001 TMC adopted the “Toyota Way 2001”, an expression of values and conduct guidelines that all employees of TMC should follow.  The values and guidelines are summarized as follows: (Human Resources Development, 2003)

  • Continuous Improvement
    • Challenge
    • Kaizen (improvement)
    • Genchi Genbutsu (go and see)
    • Respect for people
      • Respect
      • Teamwork

However, according to outsider observers, there are four components to the Toyota Way (Liker, 2003)[1]

  1. Long-term thinking
  2. A process for problem solving
  3. Adding value to the organization by developing its people
  4. Recognizing that continuously solving root problems drives organizational learning

Toyota takes pride in her insistence on being the highest quality automaker. This was validated by the trust that customers placed in their Toyota and Lexus branded automobiles. Toyota had a reputation for being the car with one of the highest resale value, and longest durability, until the recent brouhaha about the reported “sudden unintended acceleration” problem and subsequent accidents and associated loss of life.

Toyota and the Sudden Unintended Acceleration (SUA)

In November of last year, Toyota initiated a recall of some 3.8 million of its vehicles for a sticky pedal problem. The recall was voluntary, out of fears that loose floor-mats might cause the pedal to stick, increasing the odds of an accident. The recall was the largest in the company’s history.

The recall was followed by an amended recall on Jan 28, 2010, that included 5.2 million vehicles for pedal entrapment/floor-mat problem, and another 2.3 million vehicles for accelerator problem. Around 1.7 million vehicles were subject to both problems. (Toyota Pressroom, 2010)

While working with National Highway Traffic Safety Administration (NHTSA) to send letters to owners of its cars, Toyota planned a 3 pronged strategy for its recall effort:  train their dealer service staff to reshape gas pedals, redesign and ship new gas pedals, and install a brake system that will turn off the engine if both the brake and the accelerator are pressed simultaneously.

Toyota also announced that the cost of the recall will be borne by a $5.6 billion fund that the company had set aside for recalls, and thus there would be no effect on the company’s bottom line. (Toyota Press Release, 2009)

However, history of SUA didn’t start in November of 2009, but going all the way back to the last millennium. Since 1999, at least 2,262 Toyota and Lexus owners have reported to the NHTSA, the media, the courts that their vehicles have experienced SUA under a variety of conditions. These incidents have produced a total of 815 crashes, 341 injuries and, 26 deaths potentially related to SUA. (Kane, 2010)

The critiques of Toyota argue that the company ignored plenty of warning signs, in a callous quest for profit. As stated earlier in this report, there have been over 800 incidents of reported SUA involving a Toyota/Lexus branded vehicle.

Toyota brand has been tarnished by the events of this particular case, the company has been vilified, and has been named defendant in many a class action lawsuit. The biggest impact is to the company’s bottom line. According to JP Morgan’s Kohei Takahashi, the company could take a hit of 5.5 billion USD due to the SUA incident (Hosaka, 2010). So it begs the question – what went wrong for company that could otherwise do no wrong?

Will engineering ever be flawless?

As an engineer responsible for designing quality processes and procedures for complex products, I can tell you that the answer to that question is a resounding never. Even small software products have millions of possible combinations of software code-paths that will be impossible if not impractical to conceive ahead of time, plan it, and test it before a product is released. The job of a smart quality engineer is to design tests such that bulk of the flaws, especially the more serious ones, a customer could encounter be caught and fixed before the product is released.

In the case of an automobile, not only does it contain complex software that controls the fuel injection and breaking system, but also 1000s of electro-mechanical parts that have to work together to create a satisfactory and safe utility for their paying customers. The potential combinations of tests are impossibly huge and, tremendously expensive, as any person with a background in quality engineering can tell you. A product that undergoes this type of “comprehensive” testing will be impossibly expensive, if not impractical to create. So the question really is not, “should Toyota have caught this problem before their vehicles left the factory floor?”, instead, “Should they have taken the early warnings more seriously?” A quick peek into the history of SUA incidents might give us some clues.

History of SUA

The history of SUA did not start with Toyota. It goes all the way back to the late 1980s when SUA was reported with all manner of cars. In the popular case of the late 1980s, the NHTSA eventually ruled that the cause of the accident was “pedal misapplication”, in other words, stepping on the gas when the driver meant to step on the brake. These incidents were correlated with three things: being elderly, being short and parking (or leaving a parking space)

In Sep 2000, I was personally involved in a not-at-fault accident where the other driver crashed into the passenger side of my car, coming from behind at a speed much above the stated speed limit. The location of this accident was right on top of the Dumbarton Bridge that connects eastern shore of the San Francisco Bay to the peninsula. That driver was a gentleman of more than 60 years of age, if not closer to 70 years. He drove a Ford Taurus, and reported to the CHP that he lost control of the car as it accelerated without any intent on his part to do so. Cops who deal with cases like this were pretty sure that it was a case of an old man losing control of the car on top of a bridge with a well known condition of high winds.

One thing that any student of MGMT505 should know about human behavior is that human beings have a tendency to not blame themselves for the circumstances that causes undesirable events or outcomes. It should be easy to see why SUA was construed as one such case, not only by Toyota, but by regulatory agencies such as NHTSA.

As reported earlier in this document, the total reported incidents of SUA, both alleged and real, was “only” 841. That may sound callous, but compared to 1.2 million killed and 50 million injured worldwide in traffic accidents worldwide in year (World Report on Road Traffic Injury Prevention, 2004), the 841 figure really diminishes in significance. Now, here is the real kicker, 34% of those accidents are directly attributable to road design and the road environment, clearly a responsibility of the governments in most part of the world, whose opportunistic agents have gotten a special kick out of demonizing Toyota Motor Corp(TMC) (Santos, 2002).

In addition, if one looks at the demographics of the driver fatalities in these SUA incidents, a striking pattern emerges. In the words of Megan McArdle, “The overwhelming majority are over the age of 55. The elderly are more prone to this sort of neuronal misfiring. This effect would be enhanced by the driver being slightly misaligned in the seat when he first gets in the car. This is not too hard to understand, given that even a basketball player who makes 90% of his free throws sometimes misses the hoop.”

The data from the recent Toyota SUA complaints paints a very similar picture (Williams, 2010):  (McArdle, 2010)

When a car accelerates unexpectedly, the driver often panics, and just presses the brake harder and harder. Drivers typically do not shut off the ignition, shift to neutral or apply the parking brake.

 (McArdle, 2010)

To quote Ms. McArdle again: “in many cases, there were no witnesses, therefore no exact details as to when the car started to run away. In fact, in many cases, the best witnesses to the incident were all killed in the incident, and their families just doing what they can to reconstruct what happened from their prior knowledge of the deceased. In some other cases, the police or doctors have an alternate theory of what happened: one of the victims was bipolar, which puts him at a high risk of suicide; two other young drivers were driving at very high speed, which is something young men tend to do regardless of the stickiness of their accelerator; and few other drivers seem to have had a stroke to which the doctors/police attribute the acceleration” (McArdle, 2010).

In any event, once you digest all of these facts, it becomes clear as to why Toyota did not consider this as overwhelming evidence of a serious problem. That is not to say that it is the drivers who are necessarily at fault. Whatever the defect in Toyota vehicles, it is not smart enough to pick on short and elderly drivers.

None of this is going to help Toyota. Its image has already taken a toll in the eyes of the public, it will continue to face waves of lawsuits, and it might be very difficult to get a fair trial.

Qui Bono?

It should be clear to any student who has completed the MGMT505 course that financial consequences of ethical negligence, purposeful or otherwise, on the part of corporate management, could be devastating to that company. Anyone doing a rational analysis of the situation will find it hard to buy into the narrative that Toyota did not care how many people it killed so long as they made a profit. Not in this day and age. It is too risky, in this age of nosy regulators and angry consumer activists.

Why is Capitol Hill so eager to publicly crucify Toyota executives? One possible answer could be found in the fact that the U.S government can no longer be trusted as a disinterested third party whose sole interest is to protect the U.S citizens they have vowed to represent. Because earlier last year, U.S government chose to become a major shareholder in couple of Toyota’s bigger competitors, in a politically unpopular move, I might add. Sunk-Cost fallacy tells us that those who supported the decision to bailout GM and Chrysler have a vested interest in making sure that their decision turns out to be a positive one. That is not to say that this SUA was born out of a conspiracy on the Capitol Hill, far from it. The congress is, merely, taking advantage of a situation that was thrown into its lap.

When the Transportation Secretary Ray LaHood urged Americans to “stop driving” their Toyotas this January, was he speaking as the head of a federal agency concerned with highway safety or as a sales advocate for a nationalized GM?

Moreover, according to WSJ, lawyers across the U.S are clamoring for lucrative roles in the litigation against TMC, hoping to emerge as leaders from the scrum of those who have filed dozens of lawsuits (Searcey, 2010).

It is clear, that corporations sometimes as large as TMC could be victims of persecution just as much as ordinary citizens.

Conclusion

The Toyota’s voluntary recall case is a clear sign that markets work as they should. A functioning market is one in which the various companies produce products that meet consumer demands – for products that are safe and effective. Companies that don’t meet this demand, intentionally or otherwise, risk losing customers and money, as the Toyota case has demonstrated.

Toyota’s decision to recall 3.8 million vehicles came in the backdrop of its regulator, NHTSA’s reluctance to reopen a closed investigation into potential defects in Toyota branded cars, clearly demonstrating private sector’s incentive to compensate for perceived problems. Errors are part of life, we all make them, and the management of TMC is no exception. Correcting errors when they occur is a necessary part of a well functioning market.

There are trusted private organizations like Consumer Reports, Kelly’s Blue Book, Edmunds.com etc. that have incentive to provide reliable, accurate and timely information on product quality and safety. Customers trust similar organizations when deciding to buy consumer electronics or appliances. So the Toyota SUA experience doesn’t prove the necessity for more regulatory bureaucracy.

The parent organization of consumer reports, Consumer Union, has about the same number of employees as NHTSA – 600 employees. While Consumer Union generates revenues of over 200 million from its willing customers, NHTSA costs tax payers upwards of $850 million (NHTSA FY 2009 Budget Overview, 2009).

If those aren’t enough reasons to distrust more regulations, consider this, among the legislators investigating the Toyota recall are Senator Rockefeller(D-WV) who admits to lobbying Toyota to build a plant in his state, and Representative Darrel Issa (R-CA) who still serves on the board at the auto alarm company he founded, which sells to Toyota. Lawmakers also have an incentive to just chase after catchy headlines.

Politicians in their quest for power and eagerness to boost their own egos have hurt a company with a longstanding reputation for serving its customers, known for producing the highest quality products in its market segment. The hurt that the regulators has inflicted on Toyota has far reaching consequences, in terms of lost jobs at TMC and its dealerships around the world, the loss of trust, and loss of shareholder wealth(therefore retirement funds for many), not to mention the anguish it inflicted on millions of anxious owners of automobiles made by Toyota/Lexus.

To sum up, the incentives to serve the customers’ interest clearly lie with the private sector and not with the government – politicians or bureaucrats. Toyota could be a victim of its own conscientious choice to recall cars. What message are the regulators trying to send to businesses by waging a war against Toyota Motor Corp.?

Bibliography

Hosaka, T. A. (2010, March 16). Toyota recall may cost automaker $5.5 billion. Retrieved from MSNBC: http://www.msnbc.msn.com/id/35893905

Human Resources Development. (2003). Environmental and Social Report. Retrieved from Toyota: http://www.toyota.co.jp/en/environmental_rep/03/jyugyoin03.html

Kane, L. D. (2010). Toyota Sudden Unintended Acceleration. Safety Research & Strategies.

Liker, J. (2003). The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer. McGraw-Hill.

McArdle, M. (2010, March 12). How Real are the Defects in Toyota’s Cars? Retrieved from The Atlantic: http://www.theatlantic.com/business/archive/2010/03/how-real-are-the-defects-in-toyotas-cars/37448/

(2009). NHTSA FY 2009 Budget Overview. NHTSA.

Santos, F. a. (2002). Human factors for highway engineers. Emerald Group Publishing.

Searcey, D. (2010, March 14). Lawyers Vie for Lead Roles in Toyota Suits . Retrieved from WSJ: http://online.wsj.com/article/SB10001424052748703457104575121571198599134.html?mod=WSJ_auto_LeadStoryCollection

Toyota Press Release. (2009, November 25). Retrieved from Toyota: http://pressroom.toyota.com/pr/tms/toyota/toyota-announces-details-of-remedy-152140.aspx

Toyota Pressroom. (2010, Jan). Retrieved from Toyota: http://pressroom.toyota.com/pr/tms/news.aspx

Williams, P. a. (2010, Feb 28). Toyotas, deaths and sudden acceleration. Retrieved from LA Times: http://articles.latimes.com/2010/feb/28/business/la-fiw-toyota-deaths-list28-2010feb28

(2004). World Report on Road Traffic Injury Prevention. Geneva: WHO.


[1] http://www.massmac.org/newsline/0806/article01.htm