October 17, 2019

Why increase the Price of Water?

Landscape Photography of Water Falls by Diana Dorčáková.

There is a reason why utility industry is regulated by the government; water for example is a life blood of the society. If you try to make this industry for profit and purely capitalistic (profit maximization oriented), private business interest might dominate the public interest. Private interest cannot mix with the public interest; private interest is for personal growth while public interest is for everyone’s good.

You see, if you are a leader of a private company, your goal is to make your company grow; the problem arises when you realize that your good is a public good. You realize that water is not owned by your company, it is a public wealth, and therefore you must not act as if you own this resource. You are the distributor of the water; you are not the owner of the water. If the private distributor of the water disregards the interest of the public, then the government must find a way to protect the public interest and the said public wealth (the water).

780% increase in the price of water is a public threat; a private entity exercising its power to the most valuable resource of the earth, saying to the public that I can increase the price of water whatever percentage because I will be fined by the Supreme Court (for almost 1 Billion Pesos) for not complying in the Clean Water Act, and therefore the public must shoulder the burden. Why are you so afraid of the income lost that will be brought by fine? Why can’t you own the responsibility of fixing the problem rather than throw it to the public? In the first place, why are you warning a water price increase in a country with so much supply of fresh water reserved(Philippines Renewable Internal Freshwater resources: 479 billion cubic meters; among top 20 worldwide. Source: 2014 World Bank Data)? Furthermore, you know that water is a public good, water is not for pure profit business; you must use economies of scale if you want to create right profit in this industry; you must expand your service and reach, increase efficiency by lowering the cost of distribution by investing in new technologies, rather than directly increasing the price to increase your profit. You are almost a monopoly, you have less competition; income should not be a problem to your company – then why would you result to price increase?

I hope that this private institution will not add-up to the economic problems of the society. Always remember, that you (water company) have a big part to play in ensuring the good welfare of the public. You are the distributor of one of the most valuable resource of our country; don’t betray your countrymen, just for your own good.

[In reaction to 780% water price increase warning]
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October 9, 2019

Value is different from Price

Close-up of Water Pouring in Glass by Coco Images.

When we think about value, many times we associate it with price (find the synonyms of “price” and you will find the term “value”). We put value to almost everything specially when the price is high - we value land, car, house, and jewelry not only because of its use (or utility), but because these things are considered prize possessions and can command high price. But, is there really a difference between price and value? 

In business field, it could be perceived as a waste of time to discuss the difference between price and value, since both terms are being used interchangeably in the said field. But I think there is a significant difference between the two terms, and I would argue that these terms should not be used interchangeably. Value is synonymous to the terms: "importance", "usage" and "utility"; while price is much influenced by "supply” and “demand". Value answers the questions like: what is the importance of the product? What is the usage of the product? Therefore, value is not easy to quantify compared to price. Price on the other hand is market driven and its numbers (quantity) are readily available in the market; that is, the price of a product might go up or down depending on the bid and offer price in the market.

Theoretically, price in the real world might not reflect the real value of a product. If price reflects value, then high value products must have high price. Hypothetically speaking, food has high value compared to jewelry (food is more important than jewelry); some families would readily trade any jewels to cash so that they could buy a food, yet 1 gram of gold is priced higher than 1 gram of rice. If truly price reflects the value of a product, a 1 gram of gold should not be priced higher than 1 gram of rice. Others might say that gold is more valuable than food that is why it is priced higher! In response, if truly gold is more valuable than food; if say we remove food from the economy (no any food to eat at all), then realistically speaking, miners and jewelry makers will not be able to work because there is no food to bring energy to their body, and as a result, jewelries (gold) will not exist in the market. In this case, I would not say that jewelries are more valuable than food, because the absence of food will result to absence of jewelries; but rather, I would state that jewelries can command high price compared to food. Then again, this example would prove that value is not equal to price in some cases. 

Price is market driven, whereas value is subjective or personal. A carpenter will give high value to a hammer compared to a writer; while a writer will give high value to a pen compared to a carpenter. A technologist will value personal computer compared to a mechanical watch, while a horologist will argue that the art of watch making is much valuable than automated production of computer. On the other hand, price is market driven in the sense that it can be influenced by supply and demand. Given that the supply of a product is in normal state, an increase in demand will push the price up; if consumer demand for a product is in normal state, and the supply of the said product declined – then price will go up as well. As expressed previously, it is evident that the Law of Supply and Demand is very applicable in determining prices.

Factors of production can also affect the price. Particularly, the cost of labor, land, and capital has direct effect on price; an increase in the cost of production will increase the price of the product. Factor of production is also the reason behind the Water-Diamond Paradox. Water-Diamond Paradox argues that water is more valuable than diamond and yet diamond commands higher price. The reason behind why diamond is priced higher than water is because a lot of labor and capital is required to extract diamond underneath the ground. On the contrary, water above the surface of the earth is so abundant that fewer labor and capital is required to extract the said resource. But again, I will reiterate that even though diamond commands higher price than water, it is unquestionable that water is more valuable than diamond; because non-existence of water will result to depletion of life and thus will result to in-ability to extract diamond. 

The value of our possessions should not be based on price, but rather, it should be based on how these things enhanced our life and well being.

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September 26, 2019

Everything is a Theory unless it’s a Law

Blue Jelly Fish by Public Domain Pictures.

When we talk about things, when we hear statements, we have the tendency to believe that the information is true specially when the information is coming from a reputable people and organization or the information is coming from a friend or a family. Little do we regard that in this world that we are living, there are only few universal truths (laws), and that most of the statements we encounter everyday are just theories. If you are a college (or high school) graduate you would probably know, that in science, there are only few “laws” that we can call. We classify a statement as a law if it is unquestionably true, which means that the statement has been proven scientifically many times using statistics, mathematics, and experiments; and no test or evidence can proved that that the statement is false. 

Laws are being developed with the help of data and empirical evidence using observation and experimentation, in this sense, a law is a discovery rather than a creation; laws are already existing waiting to be discovered. In general, every statement can be a law as long as you can prove that your statement is universally applicable to everything using legitimate evidences. In economics we have – Laws of Supply and Demand, Gresham’s Law, Say’s Lay, Law of Diminishing Marginal Utility, Ricardo’s Law, and Okun’s Law. In physics we have – Conservation Laws, Laws of Classical Mechanics, Laws of Gravitation and Relativity, Thermodynamics, Electromagnetism, Photonics, Laws of Quantum Mechanics, and Radiation Laws (to physics students: please correct me if I’m wrong or if I forgot to mention a law). If you observed, economics and physics school of thought have existed for many years and yet, the laws that each school holds are less than your fingers. So why do we in some cases, believe in people (or information) as if they were speaking of the universal truth? While the fact holds that universal truth is hard to achieve? I think rather classifying information as universally correct, we should be quite critical, and classify most information as “theories” (or hypothesis) subject for testing. It goes with the saying that what can be true to you might be false to others, or what might be helpful to you might not be helpful to others. Therefore, people who claim that their statement or idea is universally accurate should be ready to defend their claim using unquestionable empirical evidence. 

In this era of information technology, we are faced with abundant information which can harm or help us or can just drain our time and energy; hence, it essential for us to have a critical mind so that we can decide carefully which information is true or false, important or not-important. Knowing that discovering universal truth (law) is not easy (you will become a Nobel prize winner if you discover one), that it requires a lot of labor, evidence, and experimentation; makes us humble enough to recognize that some of the knowledge that we acquired, and opinions we hold, are just intelligent guess.

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September 20, 2019

The Minimal Economy

Person Taking Picture of Beige Building Using Black Smartphone by Vlad Bagacian.

The term “minimalism” is not new to people nowadays, which means living productive (having a decent life) using less stuff (things). In present time, the minimalist trend has crawled in our economy (developing and develop countries). In the past, you need books, papers and pens to study, now you only need a mobile phone or a tablet to do all the studying stuff. In the past, we use television, telephone, pager, newspaper & magazine, calendar, alarm clock, game console, stereo, MP3 player, CD/DVD player, FM radio, camera and video recorder separately; now, all of these stuffs are packed in your smart phone. You don’t need to buy a car to have a car, nowadays; you can use your phone to book a car ride. You don’t need kitchen equipment to eat a decent food; with just one press in your phone, someone is ready to cook and deliver a food for you. We are now in an era of “dematerialization” with the help of advance technology. And, who needs a wrist watch nowadays - it’s also in your phone.

From big vacuum tube TV, we are now using infinity display smart phone, which are using high definition screen technology and using less energy. As technology advanced, efficiency will increase, from producing a 20 km/h metal bicycle, new technology is enabling us to create a 50 km/h bicycle that is made from carbon. The bicycle materials are getting light, aerodynamic, durable, and less costly with the help of new technology and engineering. The future of cars will soon go to this direction, carbon frame engineering, powered by electricity and smart technology.

As cities progressed, walk-ability will be one of the standards of a modern city, soon, people will use less cars and more people will walk as the proximity of their homes get close to their work and walking paths get comfortable and safe. Houses can now be prefabricated using light materials; development in this segment will enable high quality low cost housing. Vertical farming is also revolutionary; space will no longer be a problem for agriculture development. Lighting systems is getting more efficient, the use of “led light” provides better lighting using less energy. Renewable energy development will also pave the way to abundant energy supply which will result to low cost clean energy. Even the use of paper bills and coins are getting less, we can now use our phone to pay bills and buy things. 

Tech evolution is people empowering, getting more productivity using less resources; and less stuff means less waste.

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September 11, 2019

Is Stock Market Gambling?

Ace of Spade Playing Card on Grey Surface by Pixabay.

I was listening to an economics podcast in US and a guest commented that stock market is gambling. I would argue that it’s not, why, because gambling is a “zero-sum game” where in a players loss income is equivalent to other players gain income. Stock market is the opposite; your winning income depends on the success of other stock players – prices of stocks would most likely go up if the stock market players perceive that their colleague player will not sell at a low price. Thus, for a stock player to win, it is one of the essentials that his colleague must also win. 

There is also a big difference in the length of playing in gambling and stock market. Gambling is like, you bet your money that the coin will be heads and in a flip of a second, it turn out that the coin is tails, and in a flip of a second you lose all the money you bet. Stock market is not like that, or investing should I say. In investing you bet your money in a company you think that will be profitable in the future - you make a research, analyze trends, the financials, the news, and when the prices go down – you don’t lose your money as long as you don’t sell your shares of stocks. You can cut-loss, but unlike gambling, you don’t lose all the money you bet. 

This simple fact reminds me that, traders and investors should not go to stock market as if they are gambling, because stock market was established so that everyone could win – it is even called a “security” and well regulated by the government. It is also good to mention again that stock market is not a “zero-sum game”, which means your win is not another’s loss, in the long run, if everyone wants to win in stock market, a win-win mindset must always be present – not a gambling mindset.

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September 4, 2019

The Economies of Scale is the Future

BGC Parks by IPR.

There is a concept in economics that is very relevant today, this concept might be one of the solutions to poverty, the concept is known as the economies of scale. Economies of scale pertain to production of goods (products) at the maximum level – as production increases, average cost of producing a product decreases. Using hypothetical example, if you have a agriculture land that is capable of producing 10,000 tomatoes and you are only producing 1,000 tomatoes (at a price of PHP 1 each which is equivalent to PHP 1,000 income) then you are not applying economies of scale, but if you maximize the use of land and harvested 10,000 tomatoes (with the same number of laborer) then you are applying economies of scale. Assuming that the business is better-off with PHP 1,000 income, the 10,000 produced tomatoes could be sold for only PHP 0.10 centavo (PHP 1,000/10,000 tomatoes) which is 90% lower than previous price of PHP 1 if the business chose to produce 1,000 tomatoes only (take note that in a competitive market, consumers will most likely choose products that are affordable). The said example is a win-win situation between business and consumer; the business was able to realize the target PHP 1,000 income and the consumer was able to buy tomatoes at a very low price. The implication of this is that, economies of scale could be one of the answers to poverty; by lowering the price of goods and services using mass production (or maximum production technique) with the help of new technologies, purchasing power of people could be enhanced. 

If you imagine the application of economies of scale, its use could be universal, and could be applied to almost everything. But first, if we want to solve poverty we have to apply this concept first in the basic products - such as food, shelter, clothing, energy, transportation, and health products. Imagine if we can reduce the cost of all this products to almost zero, because of the efficiency in production that would be brought by technology, then, that would be the future that everyone could envision. I am sounding idealistic here, but if we want a better world that is inclusive, countries should start to re-think the concept of economies of scale. 

But before anything else, how can we encourage businesses to produce products and sell it at a very low price? Application of economies of scale is not new, if you look in the internet and go to shopping websites, you would notice products from China that are sold at a very competitive low price, so low that it is almost free (e.g. mini led lights for only PHP 10 – at this price the poorest of the poor can afford to own a light). I think this is one of the secrets of success of China; they can produce plenty of goods and sell it at a very low price. In the case of developing countries like Philippines, taking energy as the case; if we encourage investments in energy plants, which would increase the supply of energy to the maximum level, then time will come that price of energy will almost be free. The almost free energy will have a chain effect that will result to lower price of other goods and services (lower transportation cost, lower manufacturing cost, lower maintenance cost and the likes). The economies of scale revolution fueled by technological advancement can start from different industries (agriculture, manufacturing, energy, transportation and etc.); if you grasp the idea, this revolution could be phenomenal that life will almost be free.

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August 14, 2019

How Does Internet Information Affect Our Decisions?

Focus Photography of Keyboard by Kacper Cybinski.

Studies would prove that our decisions could be influenced by internet information – there are rising number of influencers in social media (e.g. Youtube, Facebook, and Twitter). Information that we consider fact (or true) is the most influential when it comes to decision making. This topic is timely because, day to day we are making decisions, and day to day we are bombarded by information that could be factual or fake; important or insignificant. 

Information can be use to influence the decisions of people. That is, you could be making decisions based on influence of media (video, photo, article and etc.) that was engineered based on your data. If you are not familiar with data modelling (or should we call it also information modelling), it is the science of testing data; it is use to know which data affects one data. Questions like: 

“If you increase your advertisement (ads) in Facebook will your followers grow?” 

The data that will be use to answer this problem is: number of ads in Facebook and the number of followers. Then, the collected data will be analyze using statistical tools (apps). If statistical results are positive, then you can decide to continue to air the ads in Facebook since it has positive effect on the number of your followers. 

Knowledge of data can also be use in a bad way. For example, let say that data test shows that people tend to select strong leaders when number of violent news increase. During election, the said information could be used by a candidate by building strong-alpha male image and spreading violent news in the internet (and in television); usually they are in the form of articles, memes, photos, and videos. The people who are being targeted by the said information would be influenced that the world is full of violence even though there is no enough data or statistical evidence to prove the claim. As a result of media exposure, people could jump into conclusion that their country needs a strong-alpha male leader because the world is full of violence. 

In defense to the above example and realistically speaking, there are negative events in this world, but there are positive as well, thus, one cannot conclude or isolate that the world is negative alone (and one cannot also isolate that the world is positive alone). The point is that one person should not jump into conclusion based on few evidence.

There is a tendency for people to believe based on what they are seeing rather than in statistics – people might not distinguished the difference between “trending” and “pressing” issues (trending topics does not mean that they are the most pressing issues in a country). For example, do trending stories about celebrities more important than issues that relates to leading cause of death in a country? Would you be more concern about the social life of celebrities than information that would help extend your life expectancy? Would you be more concern about the trending beautiful faces of celebrities than the information that could help you regain your health, which could then result for you to have a healthier skin? 

Internet (and television) tends to feed us with information that we “like”. If we like violence and hate speech, then internet will make sure that we see more of this in our feeds every day. If you like celebrities, then your feeds will be full of celebrities. Internet feeds (social media) are designed to show us what we like, not what the world is really like.

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August 8, 2019

PH Economy Slows in Q2: Rate Cut versus Inflation

City Buildings during Orange Sunset by Luis Enrique Carvajal.

Philippines Q2/2019 GDP growth registered at 5.5%, lower compared to previous year’s 6.2%. It was already seen that the delayed in government spending, due to delayed passage of P3.7 trillion 2019 budget, would have an effect on the said growth. Also, the Contractionary Monetary Policy (lowering of money supply) last year is seen to affect the growth number as well. The eagerness of the government to tame inflation, by increasing the interest rate, could have tamed the economic growth in effect; but on the positive note, inflation has significantly declined on average from 5.13% in 2018 to 3.40% in 2019. Now that the growth number seems out of projection, the central bank (BSP) might cut the interest rate, to boost the money supply, in order to stimulate the economy. But this could be a double edge sword scenario - unwarranted economic stimulation could push price up which is not good for the economy. 

I think it is very important for central bank to consider the price of basic goods before it acts on the rate cut, especially today that we are in midst of typhoon season, where supply of some agriculture products might decline – which could result for prices to go up. Increasing the money supply while the supplies of goods are declining could back fire on inflation.

If there is something to be monitored, I think that is the timeline of government projects from conceptualization to implementation stage. Good execution of Expansionary Fiscal Policy could boost the economic growth. 

It is noteworthy to mention as well, that it is vital for government to encourage investments in agriculture sector since it is the backbone of our economy; if we have abundant supply of agriculture products, there would be less pressure on prices when money supply is increased. In addition, increasing the supply of energy, by building renewable energy plants, would lower the cost of energy and would serve as a balancing agent in times of inflationary pressures.

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August 1, 2019

Functionality versus Having It All Mindset

Vietnam Streets by Fabian Irsara.

Some theories in economics argue that having more things in life means greater fulfillment and happiness. The basic idea about acquiring more goods is that having more options is much better than have less options, or in other terms, having many choices is much better than having fewer choices. Which boils down to the question, does having more things (or goods) under your roof, better, even if you don’t make use of all this things. 

Economics is the study of allocation of resources, which means economist study how goods and services are put into good use. In the case that we are talking right now, we are trying to analyze whether acquiring lots of staff is better choice compared to owning goods based on function. When we talk about functionality, we mean to say that you are acquiring a product based on its use rather than its ornament, marketing, endorsement, brand, and price. Thus, the term function is synonymous to usefulness, quality, specification, standard, and features. For example, if you decide to buy a bicycle so that you can display it into your house, rather than use it, then you are not buying based on functionality. 

Buying based on functionality is rooted on the idea that you are buying a product to add functionality or productivity to your life so that you can achieve your greatest potential (so that you can do more things). In other words, if you buy a product (or service) based on its function, then the product should enhance your life. Going back to bicycle example, during the days without bicycle, you walk to your office from home for about 30 minutes, but after buying a bicycle, your travel time was cut to 15 minutes (as a result you have added 15 minutes to your coffee brake); this is a good example of buying a product that enhances functionality. You should note that this example is subjective, I only use the example to convey added functionality for some people, other people might prefer to walk than to use bicycle and in that sense buying a bicycle has no added function. 

You might ask, so what is the point of discussing functionality? I will answer this question with another question. Would you buy a product if it will not enhance your productivity? Would you buy a product if has no added benefit or use in your life? A Nobel laureate in economics, Amartya Sen (1998 Economics Nobel Prize Winner), argued that what matters is not the things that the person has – or the feeling these provide – but what a person is, or can be, and does or can do with the things he posses. Sen argued that what matters for well-being (human development) is not the characteristics of the product consumed, but what use the consumer can and does make of the product (source: Economic Development, Todaro and Smith). 

Here is another example, let say you want to buy a laptop for business use – for email, internet, Excel, Word, and PowerPoint use only. You bought a P50,000 (1,000 USD) laptop; in the office you have a business partner who owns a P30,000 (600 USD) laptop, at end of the day, both of you were able to accomplish your task, with the help of office applications (Word, Excel, PowerPoint), using your own respective laptop. The 50k laptop might have more processing capability than 30k laptop, but because you are only using basic application such as Microsoft Office, your laptop has more unused processing power, while your partner’s 30k laptop is fully utilizing the processing power it has. The bottom line is that, even if you bought a 50k laptop, you may not be better-off than your partner who uses 30k laptop. In the lens of functionality, the additional 20k you paid in your laptop (30k + 20k = 50k) should have produce additional productivity, but in this case, your 50k laptop produce same result as 30k laptop. 

Another good example of buying goods based on functionality is a person who has one car and another person who has two cars; at the end of the day, both of these guys will reach their destination using only one car at a time. And at the end of the day, both of these guys are better-off since both achieve their function (driving their car to reach their destination) even if the first guy has only one car. 

In this era of more choices, we have to rethink how we buy products and services; may we learn the difference between function and price. That is, not all pricey products are functional, and not all functional products are pricey.

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May 21, 2019

The Google-Huawei Case Study


Accept it or not, technology is a big part of human life today. The big news shock the internet community when Google announced that it will be cutting its tie with Huawei. This means that Huawei will not be able to use the licensed Android Operating System (OS) unless Google lift the restriction; however, the company can still use the open source Android OS but this will limit the company from using the Google Play Store. According to internet data, 80% of the phones in the world are powered by Android; all Huawei smart phones are using Android. Looking at this basic data, we can see that the decision of Google to restrict Huawei from using Android will have significant negative impact on the company's business.

In response to Google restriction, Huawei might possibly create its own OS, but the success of that will depend on the support of application developers. Android's success has been largely attributed to its large pool of apps in the Google Play Store, if Huawei wants to create a successful OS, it would need to have a large pool of apps as well (and large pool of app developers who wants to contribute to its app store).

Nokia bought by Microsoft which was turned into Microsoft Lumia is powered by Microsoft's very own - Windows Phone OS. Windows Phone is very efficient, it is very good in managing phone memory and applications, but its app store lacks the number of apps and the support from app developers are very minimal; this eventually led to the decline of Microsoft phone users.

The case of Microsoft Lumia and Huawei has similar points, both of these companies produce good quality phone (hardware), but if Huawei would study the case of Microsoft phone it should be careful on its approach in creating a new Operating System (OS). On the other hand, if Huawei could proved that it's OS has a superb quality and has collection of apps that could match Google, then Huawei might be the next Apple. Huawei could be match better than Apple as the company has its own advance hardware technology and being situated in China gives the company access to lower labor cost resulting to low cost of phone production. 

Huawei was included by the US Commerce Department into "Entity List" which limits the access of the company from buying technology in US without government approval. Google responded to US government order by cutting ties with Huawei.

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