OPEC VS USA

Can it be that many of the let us say - "not so democratic" nations of OPEC actually are more efficient in exploiting oil resources than the United States? Contract theory is certainly pointing that way. Libecap and Wiggings paper on common pool contracting implies that the more landowners that are supposed to share an oil resource, the less efficient does the actual exploiting process become since smaller landowners have incentives to exploit at a suboptimal output level. You see the faster you try to get the oil into barrels, the more goes lost since the resource disappears and becomes unexploitable if you raise output above a certain level. Therefore when Sheik X is to exploit a new oil resource he actually has the advantage of being alone. There are no transaction costs due to negotiation or alike and there will most likely be an optimal output level (that exploits the resource at such a pace so a maximal amount can be exploited).

It is kind of ironic that this is the case. Obviously you ask why won’t all landowners just agree on output levels and produce accordingly. Well it seems that this is just theory. In practice you see overproduction and greediness that actually makes total output suboptimal in several cases, especially when you have a large amount of landowners sharing one resource. Or why won´t just one owner buy the other owners out of the deal? Well its obviously very hard to determine each landowners exact value since it´s hard to estimate exactly how much oil each owner has under his rule.

Then this might be a legal issue. IT should be harder and cost more to take go over your quota. However that quota is hard to agree on in the first place. It is the dilemma with democracy I guess.

"Overproduction is like the weather, everyone talks about it, but no one has ever done anything about it."

Oil Weekly, May 20, 1927

Hello Bruxelles?

the 2nd budgetproposition

The 2nd budget proposition produced by the centre-right alliance is a responsible one, making total surplus bigger than the official surplus goal of 2 percent of BNP. I had the opportunity of seeing Anders Borg, who has history at the SSE, summarize the budget during two interesting hours at the SSE. He obviously emphasized on how this budget is supposed to increase employment rates even more, even though they have already risen significantly since the centre-right government took over. The higher employment rate is obviously not only a fact due to the new governments work but even critics argue that the reforms that have been made have taken on the unemployment in an efficient way.

This is not a miracle but simple economical science. Sweden has a high share of structural unemployment where reallocation of workers is a big problem, with hundreds of thousands of workers being able to work in a country that is experiencing prosperous times. To lower the social security rates and force people to start searching for jobs is brushing some of this structural unemployment aside. Therefore the argument "that reforms of this kind don’t increase the amount of jobs, instead they just make life hard for unemployed people", is easily brushed aside. Obviously some people get squeezed in the new system, however the reform is supposed to make it harder for people who don’t have a job but are able to work physically etc. to go on with exploiting the generous social care system. Nobody ever said that sick people should be forced to work, that is just an empty argument made by the leftwing side.

Other interesting things that were mentioned was obviously that the tax of owning property is being replaced with a fixed fee and some raises in taxes on fuel and alcohol. This is interesting because a raise in the tax on fuel is politically very sensitive but actually a good way (one of the most effective) of increasing tax revenues. About 30öre on each litre is translated into billions. Because I believe in Mr Borg’s way of doing things I can accept this. He is financing tax cuts in other areas and obviously a tax on alcohol is preferable if compared to taxes on work.
When it comes to the elimination of property taxes I can’t say anything else than finally. It’s a tax that is hitting certain people extremely hard and it is a myth that only rich people suffer from it. The tax itself is not that bad from an economic view since it doesn’t affect the economy as a whole, however the unfairness is so evident that not even I, as an economist more than a politician, can understand and support its purpose.

I’ll end this post with a quote in Swedish. This is the response Anders Borg got from his Finnish counterpart when he was asking for advice on how to solve the serious problem in Sweden concerning the exploitation of the social care system.

"Sjukskrivningar... I Finland Anders sjukskriver vi folk som är sjuka."
Sometimes it can be so simple...
/Rob

ps. Is this a joke?

A good movie

Among many is A Beautiful Mind (2001) (2-Disc) where Nobel Prize winner John Nash’s life is being described. Nash was a great mathematician who among many things discovered the well known "Nash equilibrium" in game theory, still used worldwide when learning about game theory. It’s all about equilibria where risk averse players choose the best possible alternatives in games played simultaneously or in steps. Nash realized something Adam Smith failed to, that is that we are all better of if we act not only in our own interest (which Smith argued) but also act in the favour of the whole group. Well you could say many things about Nash, a good start is to watch this movie, and it’s a great movie even if you don’t find economics interesting. My non-economic girlfriend liked it, so I have proof ;).

Different levels of knowledge and awareness

When you talk about predicting outcomes and different levels of knowledge there is a funny experiment you could perform. In a group, ask everybody to pick a number between 1-100 (zero is not possible to pick) and determine that the winner will be the one who has guessed a number that is two thirds of the average number picked.

When you finish the game the one who has guessed a number that is smaller than the winning number is probably the one on the highest level of knowledge or at least he/she thinks so. Why? Because that someone has guessed not only what people would pick, but also what the person who guesses what people will pick has guessed, and consequently picked a number that is lower than that persons. You´ll figure it out when you do it and I really dont want anyone picking a number that is larger than 66 because that player clearly hasn´t catched up on the rules of the game.

enjoy! =)

Conflicting commitments

If you are interested in national economics there are many concise, decent papers written by one of my teachers at the SSE, Tore Ellingsen. Currently I’m on one of his articles (Disagreement and Authority, (co-author Topi Miettinen). This version June 2007) , which implies that conflicting commitments can explain why we have conflicts that seem to go on forever, even though the expected payoff of not fighting is probably considerably greater. The article is based on Schellings (1956) work in this matter, however Ellingsen&Miettinen introduce a new variable to make the model more complete, namely the cost of committing. They state that since there is a cost of committing to being aggressive (waging war) the fact that that cost is greater than the cost of staying flexible (which means not waging war) makes it more profitable to wager war. When these costs meet, both parties will be indifferent to both actions. However low costs for committing to aggression, that is to wage war, combined with uncertain roles, imply the highest risks of conflict.

Anyhow I wish you some pleasant reading.

/Rob

First stop

Here I will publish my thoughts on national and international events I find interesting. The main topic will be economics from a macroeconomic view, however politics and finance will also be covered to some extent.

Hope you will enjoy it, bookmark this blog today! ;)