Efficient to the X degree

In a Bloomberg article yesterday, Laura Millan Lombrana encouraged governments attending the United Nations climate talks to push oil and gas companies to fix methane leaks. Due to new satellite technology, which helps identify the location of the seepage, there is an economic efficiency argument to such action.

Methane emissions need to fall 70% over the next decade, a decline equivalent to eliminating CO₂ emissions from all cars and trucks across Asia, according to the report. Fixing methane leaks would be cost-effective for energy companies because the captured methane can be sold as natural gas. The cost of repairs and maintenance needed to capture methane can often be paid for by the value of the additional gas brought to the market. 

The new information (as to where the pipes are leaking) is one driver for action, but there is also the notion that the low emissions benchmark, set in the Covid year, offers up a new goal. This combination of information and technology coupled with motivation, made me think of Harvey Lieberman’s concept of “X”-Efficiency. He was a professor at Harvard and is best known for coining this concept. Here’s how he describes it in Allocative Efficiency vs. “X”-Efficiency.

Our primary concern is with the broader issue of allocative efficiency versus an initially undefined type of efficiency that we shall refer to as “X-efficiency.” The magnitude and nature of this type of efficiency is examined in Sections II and III. Although a major element of “X- efficiency” is motivation, it is not the only element, and hence the terms “motivation efficiency” or “incentive efficiency” have not been employed.

He identifies the possibility of meeting a higher efficiency with new motivations, usually in combination with other factors. In the Bloomberg article, the sense of urgency around climate change motivates the fixing of methane leaks.

The level of unit cost depends in some measure on the degree of X-efficiency, which in turn depends on the degree of competitive pressure, as well as on other motivational factors. The responses to such pressures, whether in the nature of effort, search, the utilization of new information, is a significant part of the residual in economic growth.

It’s hard to know for sure, but it sure seems like Leibenstein’s “X”-Efficiency refers to the efficiency attained in the blending of the public and private spheres.

Home is your castle

A home is consider a private good–one that owned for one’s use and enjoyment. Its says so in the county recorders after all. It would follow that one could do whatever one wants with their home. Well almost.

That sidewalk, that runs along the street, you can’t block it. You have to let the neighbors walk their dogs and the kids to ride their bikes along it. And don’t be digging near any of the utilities that have easements across your lot to bring water, electric power and natural gas onto you property. If you wake up one morning (as in the photo) and there is a huge hole in your front yard, the city can do that too. The workers can dig down and see if your water connection to the street is leaking.

Ok- fine. The front yard has restrictions placed on it, but the backyard is all privately owed, to dig up and do what you wish with it. Not so fast. If you unearth an artifact from a native American tribe, it is not yours to keep. Despite being on your soil you maybe obliged to relinquish it for the public to enjoy and appreciate as part of their heritage.

But inside the house is all mine. Well, kind of. If you live in the state of MN than your spouse has rights to the home no matter if their name in on the title or not. Which isn’t a conflict, usually, as most couples jointly enjoy the fixtures attached to the land. It’s not like there is a penny slot to fill every time you toast a slice of bread, or the washer dryer is coin operated to divvy up the cost of its use. Couples and families use the features of a home in a public fashion, for all to enjoy.

So yes the home is primarily private to the person on the title. But there are all sorts of public interests that take a little nip out of ownership.

Some, like the utility companies, provide valuable, essential services. In fact the reliability of services, like high speed internet, can make an area more desirable. The reliability of a city to be responsive to snow removal and road maintenance can create increased interest in the neighborhoods they serve. Public utilities and city services are daily necessities, hence exhibit high impact. Whereas the likelihood of a pre-historic relic being dug up on a property is rare, and so, although the public has an interest, any practical impact is low.

These are just a few of the public interests in the very private investment of a home. There are many more besides the utility commissions, and the city utilities. There are a bunch of other public entities that make an appearance on your property tax bill. There are fees for police and firefighters, fees for school districts, fees for county services.

Your home is your castle. But your castle shares many commonplace interests with lots of other castles.

Dual Sphere Commerce

For as long as I can remember, my mom tackled an extensive Christmas mailing with mimeographed updates of our family’s progress printed on colored paper. My job was to fold and insert these single-spaced typed communications into elegant cards purchased from UNICEF.

The greeting cards provided a means for people to support the United Nations International Children’s Emergency Fund while purchasing a commodity. Girl Scout cookies blend this genre of multi-function purchase. And some large retailers, like Target, will donate a percent of the purchases to the school of the customers’ choice, distributing funds to public good providers in much the same way.

When a UNICEF ad appeared as I scrolled through my Facebook feed, I clicked to see what they were up to. Holiday cards are still a mainstay with 18 categories to filter through and hundreds of choices from there. But that’s not all. The site has an extensive offering gifts, jewelry, and so on.

They’ve stepped up their offerings but also their accounting of how much the purchaser will contribute towards the benefit of desperate children. For just shy of a hundred dollars the buyer receives a hand crafted ring, and prevents 54 children from contracting measles. In addition to laying out the the tally of how many lives will receive a health benefit, the site allows the buyer to meet the artist. These brief bio’s can further connect buyer and seller through other shared interests.

UNICEF is creating an Amazon of dual sphere commerce.

2020 is a Wrap!

This afternoon, as a lingering glow alights the World Trade Center and the lights go on at the Empire State Building, as the glimmers extinguish off the Hudson River, and the sun’s rays slide down New Jersey, Pennsylvania, Ohio, across the prairies, and silhouette the mountains of the West until finally slipping off the coast of California, Oregon and Washington, as the rays sink past Hawaii and into the Pacific, we say goodbye to 2020 with a wave. And a wish that we could give it a good kick in the petuti.

But this year allowed me to start this blog and I am very thankful for that. Readers have shown up in the hundreds, well over my expectations. I have relished every like and comment. Thanks so much for visiting.

The most popular article hands down was Is it so simple? A response to Nathaniel Rachman’s article in Persuasion allowed me to unabashedly promote the view that drives me to write this blog. These last three months have been devoted to laying some ground rules to how things work. There’s really no point to continue, if folks don’t see the definitions clearly of the economic nature of public and private transactions.

Since this is an economic philosophy I need to get around to tying it to material values, and I will get to such an accounting in due course. I could bring in the numbers, and show how they are assigned to forms of capital. But should people not accept the actors and the types of activity they do, all will be explained away, talked over. There will be references to cloaking and embedding and behavior.

For people to see the hard cash, they will have to see that private individuals employ time and resources to public endeavors everyday throughout; that governments are riddled with private transactions everyday throughout; that businesses develop goodwill on their balance sheets and accommodate labor demands everyday throughout; that associations are motivated by private ambitions while supporting the group’s goals everyday throughout. Until there is an acknowledgment of this type of dual structure–there is no point to assigning slices of material wealth to each and every activity.

Economics is not just represented with dollars. There are two natures to transactions. The value does show up in capital and dollars, most obviously when being externalized or internalize. Although-that moment is but a snapshot in time, a frozen price point, that could be simultaneously the result of the in-hand trade as well as the tapped capacity accumulated over generations. Hence the necessity to understand time.

For a generation, those who control the public purse have developed a party line, with nationwide control of talking points. They’ve developed an activist type of one issue dominance, with the devastating inability to see subtle trade-offs. They’ve basically obliterated the concept of varying degrees of importance. Covid has made this glaringly obvious.

So happily ring in the New Year! And ring out the old ways, while keeping an open mind to the new.

Is it Public or is it Private-Corporate Addition

I’ve been working my way through a list which claims that economic goods fall into four categories– private, club, common and purely public– in order to debunk a misconception on how we sort economic activity. Web oriented services such as Wikipedia, NetFlix and website design hold a variety of placements in the groupings. I think it is safe to say that all three of these goods are private, since, according to a UN report more than half the world’s population is without internet service. Any good provided via the web is private to only the wealthy half of the world.

A resorting mindset is needed in order to tackle vision centered around corporate responsibilities to stakeholders, such as those described in a recent article on the American Purpose by Robert Madsen and Curtis J. Milhaupt:  The Expansion of Corporate Responsibility.

Increasingly, advocates of reform argue that businesses should be concerned about their “stakeholders”—not just shareholders but also workers, suppliers, customers, and society at large. The new movement, which is often termed “ESG” (Environmental, Social and Governance issues), is not limited to progressives and liberals, but has made substantial inroads in the commercial and financial community as well. After decades of espousing shareholder capitalism, for instance, in 2019 the Business Roundtable declared a “fundamental commitment to all of our stakeholders” in order to better reflect the way corporations can and should operate today.”

Stakeholders capitalism, “ESG” or benefit corporations are all a grappling to give this movement a name. What is it that corporations, which are intentionally private organizations, accomplish towards larger societal goals? Madsen and Milhaupt point out that corporate America has a history of such ventures, though most of us do not need convincing that capitalism works favorably upon social concerns. Even the most fervently socially-minded agree.

Yet the authors go onto express trepidation over who sets the agenda and whether expectations can be met.

Although hopes are high for what corporations and institutional investors can achieve through greater emphasis on stakeholder needs as opposed to narrower shareholder benefit, few of the ESG reformists have bothered to define what the movement’s precise goals should be. This matters because in the absence of a concrete agenda people tend to assume more than is possible, and the inexorable failure to meet those expectations generates dissatisfaction and the possibility of political backlash.

Here’s the thing– there is an entire marketplace of social concerns out there to choose from. No matter what the corporate entity decides to take on, the important step is to collect the data and account for it.

*Decide to devote its social ambitions to rectify labor inequity? Account for the extra training and support and follow the employees long-term gains.

*Decide to devote their legal staff to ironing out the thorny wrinkles in cross-country trade and all the implications of contract defaults? Account for time logged while on the company dollar, and the losses taken when the contracts fall through. Track how establishing standards allowed smaller firms to enter the market with confidence.

*Decide to use the idle time of their tradespeople and send them to a financially strapped public schools to tighten up all those leaky faucets? Account for the hours spent and estimate the savings in city water running down the drain.

The opportunities are everywhere and the beauty of the system is not to be hampered by a particular agenda, but to attack the issues which are most readily facilitated by the business and the people who make it up. To find the passion which galvanizes the employees to give of their time and expertise.

But-this is important- we can’t know how it all shakes out until it shows up in a tabulation somewhere. The trick is that the mechanics are different for social activities versus the mechanics of for profit transactions. That doesn’t mean they can’t be held to account. Already things like ‘good will’ show up on balance sheets. Think of the possibility of two colors of ink on the net income statement; one for profit and one public profit. The former total is by far the lion’s share, as by definition corporations exist to produce financial gain. Yet knowing the later, being able to track, tally, and compare it, will be empowering.

Tracking will also play into Milton Friedman’s emphasis on transparency. Through open disclosure, reports identify the social goals tackled and the benefits of eventual outcomes. It also provides signals where possible excesses, corruptions and silly virtue signaling are occurring, if not out and out fraud.

The task at hand is to identify what counts as work towards a public objective. And see how assets are used, stored and accounted for. To identify this concept of capacity and give it a number. Where do the tradeoffs get revealed so individuals will make choices with their time and energy? How could they be engaged by benefiting from a personal social objective while participating with fellow employees? The angles are multifold.

So I say– do not hold expectations in check. Run with them, write them down and see how they all add up.

Buildings that walk and roll

In Shanghai a five story primary school building walked to its new location some 200 meters away.

Back in 1985 the Fairmount Hotel was moved in San Antonio. The clip is 17:47 minutes in length but contains lots of details including a two week halt to dig up artifacts from the Battle of the Alamo, maps, bridge crossing, groups involved ( and great 80’s theme music!). Take a look at the renovated Fairmont Hotel.

I remember when the Schubert Theater was relocated, lifted and rolled, in downtown Minneapolis in 1999. It took twelve days to move the 5.8 million pound structure, originally built in 1910. But it took a decade more and upwards of 38 million dollars (not all public), to transform it into the Cowles Center for Dance and the Performing Arts. How a city comes to terms with spending that kind of money involves achieving multiple objectives. The Star Tribune explains:

Meanwhile, restoration of the Shubert will create 150-plus construction and permanent jobs, bring tens of thousands of dance patrons downtown, complete the performing-arts vision for the successful Hennepin theater district and alleviate a loitering and crime problem that has moved from busy Block E to the lonely stretch of the avenue on which sit the Shubert and the Hennepin Center for the Performing Arts. At least that’s the official pitch. The cops and the new urbanists say having people on the street trumps crime. The arts crowds frequent local bistros and they don’t make trouble.

In 1995 Minneapolis was nicknamed Murderapolis after the New York Times wrote a story pointing out that the city had a higher murder rate per capita than New York. This particular spot in downtown struggled with crime. The jobs were also successfully filled by minority tradespeople.

CEO Louis King of Summit Academy OIC on the North Side, which trains dozens of young minority folks for good-paying jobs in the construction trades, is near agreement with McGough Construction and the city. Up to one-third of the workers on the Shubert project will be women, minority apprentices and skilled minority craftsmen. The jobs will pay $18.50 to $40 an hour for months. That’s a good thing.

Wouldn’t it be interesting to see some sort data estimate and geographic tie-in to how the public investment performed? What proportion of the presence of a renovated and vibrant building on that section of the block helped with crime reduction? Did the minorities and women who worked the jobs progress in their profession? Is there an index to say x- proportion of the investment was preservation, and x-amount inflated into other community value?

Counting Intentions

If you could count intentions, package them up and gift them, the residents who had their homes rebuilt by Brad Pitt’s Make It Right Foundation, following the devastation unleashed by Hurricane Katrina, would be wealthy. Instead, the 109 property owners of the Lower Ninth Ward of New Orleans are taking legal action against the Hollywood superstar for “unfair trade practices, deception, fraud and negligence.”

Just a little earlier this month, another home in the development was demolished. As Federal courts pull apart the issues, it will be interesting to see how judges view the dynamics and assign responsibility. On the one hand you have the wealthy part-time philanthropist, full-time mega-movie-star, versus a group of mortgage paying homeowners, but then throw in architects with a penchant for environmental activism, builders, suppliers and the crime scene quickly gets muddied. The setting has changed from what Oprah.com describes here in 2010:

Leggett-Barnes and her family are some of the first homeowners in what will become a 150-house community constructed by the nonprofit Make It Right foundation, established by Brad Pitt in 2007 to build environmentally sound residences for low- and middle-income families. “We’re cracking the code on affordable green homes,” says Pitt, who envisions the Lower Ninth neighborhood as “a ‘proof-of-concept’ for low-income green building nationally, maybe even worldwide.”

The plan started with everyone on the same page. The recently homeless needed to return to plots of land, which for some, had been in their families for a couple of generations. Brad Pitt pledged 5 million dollars to take the edge off costs and provide the seed money for what ends up being a 27 million dollar project (that’s $247K per house). But then a new public objective starts to emerge, one driven by an environmental passion. Oprah.com notes:

A Make It Right house is eco-friendly from top to bottom, using at least 70 percent less energy than a conventional house of the same size. “We don’t just want to make homes ‘less bad’ for the environment,” Pitt says. “We want them instead to have an environmental benefit.” Thanks to their ventilation systems and solar technology, Make It Right houses emulate trees, purifying the air rather than polluting it and harnessing the sun’s rays to produce more energy than they consume. The homes are available exclusively to people who lived in the Lower Ninth before Katrina, and Make It Right guides families through the financing process.

It wouldn’t be the first time two objectives were tackled simultaneously: Help families rebuild their homes and make the structures energy efficient. Both admirable. But don’t miss that last sentence, ‘help them through the financing process.’ And just like that we’re off the philanthropy playing field and into the private market game. In this venue the owners are expecting to purchase from a developer, not an actor-philanthropist-activist. They sign for a mortgage. The most common number for the debt was around $150K, bringing the final cost per house to somewhere around $397K.

Just for comparison here is a listing for a new construction home in New Orleans posted on Realtor.com today.

Even at $397K (not including lot cost) one might say the extra money was well spent on energy conservation measures and intended health benefits. One might say that, if the properties hadn’t started deteriorating within a few short years.

By 2015, as most construction concluded, the project had cost almost $27 million. But complaints about the construction and materials used in the homes had already emerged.

These transactions had a philanthropic and environmental and private market component to them. The additional inflow of funds to cover the environmental objectives came in, but the new owners of these properties do not appear to have engaged as critical consumers for the core product. They didn’t check into the materials or the mechanicals or the plans. Just talk to a builder rep if you question whether consumers who build with them hover (daily) to ensure they are receiving what was written up in their purchase agreement. Perhaps due to the power of stardom, or the actual dollars being spent on their behalf, the home-buyers seem to have stepped aside and allowed others to do their bidding. Until as the New Orleans Advocate reports:

In September 2018, homeowners Jennifer Decuir and Lloyd Francis sued Make It Right for what they alleged was deficient construction that caused mold, poor air quality, structural failures, electrical malfunctions, plumbing mishaps, rotting wood and faulty heating, ventilation and cooling.

The dynamics of philanthropy allows for an individual (or group) with extra funds to choose a public need and steer their resources accordingly. The recipients are asked only to consider reciprocating at some future date, should they find themselves in a similar situation. If the courts place the blame on Brad Pitt will that inhibit the flow of goods and services from the wealthy to those in need for fear of liability? Were the end consumers not responsible in a buyer-beware type of way to check out what they were buying? From what the articles (USA Today, NPR), they had owned and maintained homes in the past.

There’s plenty of blame to go around. The architect John C Williams collected $4 million in fees. There were permits and inspectors and building codes. And maybe some blame should end up at the lenders’ door for not questioning the innovative, but untested systems, going into the project. In the end they are on the hook for the paper if a homeowner walks and abandons their property. But mostly, in the for-profit market, the relationship between the developer-builder and the home buyers establish the acceptable combination of durability, green components and price.

The problem wasn’t a lack of intentions. The problem was that the philanthropist-activists bypassed the marketplace and all the small interactions that make it up. The fatal flaw was the thought that with enough money, and passion, all the feedback and tussles between consumers, and inspectors, and building code committees, and brokers, and city planners, and developers, and real estate agents, and electricians,…that all those players interacting in a market setting, just doesn’t matter.

The market continues to shuffled through the consumer choices when judging the environmental impact of products. Standards are set by producers of furnaces and A/C units; power companies offer home energy audits and neighbor consumption comparison; neighbors talk to each other; contractors share incentives; all in the effort to advance a public goal of energy savings. But at each step that goal must be incorporated into the overall integrity of the purchase at hand, or homes will fall apart just like those in the Lower Ninth Ward.

Praise for Brad Pitt remains high, and the contention remains that his intentions were and are completely genuine. It looks, however, as if he will pay dearly for moving toward an ambition without vetting it through the market system. This story shows us that it is not enough to imagine a better world, and poof! It will happen. Progress takes the engagement of all players, giving feedback through action and pricing. Progress depends on markets.

What is Public- National Defense edition

National defense is the most common example cited as an economic public good. It is certainly the oldest public good, harking back to the times of kings and round tables, and even before. Allegiances were made, city walls built. But let’s see if it always meets the economists’ definition of providing a service that is non-excludable and non-rivalrous.

The name alone gives away that it is already a different something than, say, sunlight. Right off the bat the precursor ‘national’ tags the defense to a nation. So it is a service to one nation, excluding all outsiders. In this case being non-excludable really means the service cannot exclude citizens of the nation in question.

However, there also seems to be all sorts of exceptions to this rule. Take the Japanese Americans that were locked up during WWI. Around sixty-two percent of the internees were US citizens and yet a global conflict thrust them at odds with their nation. Recently Mike Pence criticised the President Obama Administration for not rescuing ISIS hostage Kayla Mueller. The claim being that this US citizen did not receive the protections of national defense that she and her family deserved.

Like any definition it only takes one counter example to throw the statement into question. Let’s consider whether the good is non-rivalrous: that the use of it by one consumer does not diminish the use of it by another. This seems right. Everyone in Philadelphia received the same protections against terrorism when Navy Seals took out Osama Bin Laden, as folks in Albuquerque. This mastermind of evil would do harm to any American which means his demise makes all Americans safer.

Yet, our history is riddle with military involvement in countries in efforts to preserve business interests abroad. In the early part of the twentieth century the US defense forces were repeatedly used in Nicaragua to protect business interests. Declarations against such activities include objecting to the use of a national resource to benefit a sub-group, the business community. (excludable) And since the military is run on a budget, the occupation of Nicaragua from 1912-1933 undoubtedly took away from expenditures on other national defense initiatives. The end goal of defending all citizens is rivalrous as there is always a menu of possible national pursuits that could drain the national purse.

It seems to me that there are no such things as goods that are solely for the public benefit. There are only goods, or rather goods and services. And those goods and services can be used by individuals or groups, for private or public objectives. Some goods, by nature, are more prone to be shared within groups. Some are more productively produced while strongly preserving private property rights. Groups with shared interests decide how to employ goods and services, where the groups can be as large as the human race all the way down to a couple.