>13% of US households will owe more mortgage than their house is worth

"As for the sub-prime crisis, it is estimated that by the end of this year, 15 million U.S. households could be 'upside down' on their mortgages."

That's over 13% of all US households!

Read entire article here.

A new economic hypothesis

Society is made of individuals. Each person plays different roles. Some roles are critical to economic theory: The individual investor, the employee, the creative engineer, the manager, the business owner, the consumer and the regulator.

Each role has different priorities.

The individual investor wants to maximize returns with minimal investment, lowest risk and with total liquidity. The employee wants to be paid the most for minimum work. The creative engineer wants to create the most perfect product he can conceive, and would laugh at consumers who don't realize that that is what they need. The consumer wants the best product for the least price. The business owner wants to maximize shareholder value by having highest revenue and margins with minimal cost. The manager has to deal with resolving all these conflicting needs, while growing his salary and stock value. The regulator wants to ensure that the economy remains balanced - i.e., most people have ways to make enough money to have a prosperous life.

Adam Smith basically suggested letting everyone of these roles to sort it out without the regulator's intervention. He believed that the invisible hand of the free market would ensure prosperity without the need for heavy regulation. He also gave the highest power to the businessman as opposed to the employee.

Marx removed the businessman from the system and empowered the regulator and the worker.

Veblen and Galbraith argued for the rights of the consumer, and believed that the creative engineer should be empowered to produce the best product for the consumer.

Keynes gave power to the regulator to fix any imbalances, by inducing spending all around.

Given this background, let us articulate the problem we are set to solve. We want to find the best approach that satisfies all of these roles. We also want this approach to be stable, i.e., these roles must, as a whole, be satisfied for a long time under this approach.

We can analyze this problem by empowering each of these roles to go after its goals, and see if that achieves our two criteria: satisfying all roles concerned, and sustaining that satisfaction for a long period of time.

First, let us empower the individual investor to do whatever he can to achieve his goals - to maximize returns with low risk, minimal investment and highest liquidity. Now, there are several measures he can take to achieve this goal, and he may come up with this magic investment scheme where he makes a lot of money. However, this only benefits the companies who's stock he buys. He also does some Keynesian good, where he may pump more money into the economy due to his new found affluence, which leads to more allround prosperity. In this case, investor gains, the invested organization/industry's employees gain, though their actual revenue may remain unaffected. However, the business investor does not gain directly in any sustainable way, as the mere investment in his business does not guarantee any revenue or margins to his company. The creative engineer also doesn't gain anything from this. There is no specific reason for the regulator or the consumer of the firm's product or service to benefit from this.

Second, let us empower the employee - let us pay him for doing no work or minimal work. The employee may be happy, but everyone else would suffer. The creative engineer and the manager would slack, as they wouldnt need to work to get paid. The business would suffer, and so would the customer, and eventually, the reguators as well.

Next, let us empower the business owner. He gets lots of revenue, at minimal cost, driving share value up, investors are happy. However, the consumer is unhappy, since he didnt get anything in return for the money invested. The creative engineer is also unhappy - he is not funded to do what he believes will yield the best value for the consumer, since customers are willing to pay even without that cost. The regulators are happy, as long as consumers and creatives dont take to the streets in protest.

Now, let us empower the regulator. The regulator can, through some interest rate magic, possibly satisfy the businesses, employees, etc. However, he can never directly satisfy the creative engineer or the consumer.

Next, what if we empowered the consumer? Each consumer is given whatever he asks for. Businesses would never scale. Imagine a mass used product like some software - if each consumer, who may not know what it takes to provide a feature, begins to demand what he needs, then businesses will be drowned under the costs of providing individual personalized implementations for each consumer.

Finally, let us look at empowering the creative engineer. By engineer, we do not mean an engineering degree, all we mean is that this is a person who is passionate about building the best of technologies
for a given problem. The engineer creates the best product for a problem. The business is pleased, as it solves a genuine problem, and they can hence charge customers a good price for their effort of bringing the right solution for customers as a whole. This automatically builds the brand of the company with the best solution, and that gives the company the durability it needs. As long as companies continue to focus on creating value for the customer, customers will continue to trust them and be willing to pay for their effort. Most customers are happy as the solution focused on solving their problems. Finally, the regulators are happy as the economy is thriving which frees them and their resources up to work on other critical things.

Granted that these arguments are somewhat oversimplified, and you can argue almost any point here for years. But the obviousness of this thesis is unmistakeable. The summary? By every role focusing on empowering the creative thinkers to define the right solution for the segment of targeted customers, we have a positively reinforcing cycle of events that leads to overall prosperity for the economy.

Money for Nothing - II

Continued from part 1 ...

5. Pay me even if you don't use:

Companies are interested in sustained cash flow. They have hence come to prefer getting 5 bucks a month for what they offer rather than a one shot fee of a 100 bucks. This also has the advantage of enticing customers - 10 bucks sounds an affordable amount every month, whereas 100 bucks may be a lot to spend upfront. Hence, the arrival of subscription services and the wave of more and more subscription based services. I sign up for this cool service, say a local gym. I pay 50 bucks a month for my membership. I use the gym regularly for three months. Then, life catches up and I slip up for a couple of months. Now, I am a bit annoyed by having to pay fifty bucks for the two months that I didnt use the gym at all. I consider cancelling my membership. But, as always, there is a catch - a closing cost, or at least there is some cost to reenrolling two months from now, when I want to restart. Same thing with subscription based web services. I would much prefer to make micropayments as I go for services that I use intermittently, but the option is rarely available. Most online video rental services charge a monthly fee, irrespective of whether I use the service. IIn a busy month, when I dont want to watch movies, I have two choices - pay money for nothing, or use the service even when I dont want it. I have seen a new model emerge on an Indian movie dvd rental site that charges a reasonable amount per use, subject to a maximum monthly cap. Much more customer friendly.

6. Get hooked:

The other great model to ensure sustained revenue is the two year agreement from cell phone companies. I cannot see any justification for that, barring the lack of confidence of my phone company to continue providing value. In other words, what the agreement really means is: I dont think I can keep you interested in using my service for the next few years, but I need your money nevertheless, so just sign the money for the next two years over. Of course, you have the choice to pay ten times as much for your phone. You also have the flexibility to cancel the service, pay me the hefty penalty and buy another phone or switch companies, but the only thing I am sure of is that I cannot keep you interested and committed for the next two years. There is definitely something wrong with the service or the phone that will annoy you and you will wish to switch, and I cannot afford losing you.

7. How much?

Remember the time when hawkers used to ask the customer this question? It still happens. In flea markets, probably in some obscure markets somewhere else, but in general, it is history. In most cases today, it is almost always the customer who asks the question how much, and then decides whether to buy the good or not based on the price. The only model that at least halfway resembles this in the mainstream today, and is for that reason widely popular, is on online auction sites. Here the customer is still at the mercy of the market, but at least the buyers determine the value of the product, and not the seller. An important limitation here is that customers are still stuck with the product, or have to take the pains to return the product if it doesnt match their needs.

Next up: the concluding part 3 of this series.

A semi-fictitious history of value

In the beginning there were a lot less people. People migrated to fertile regions of abundant resources, usually besides a plentiful river, and usually there were enough resources to satisfy the needs of the people. When it got crowded, people moved to other fertile regions and this went on for a while. Meanwhile, more needs arose, and people invented bartering. The cowherd would trade milk for grains from the farmer. And this led to a richer quality of life. A shepherd could focus on rearing sheep and still get milk, grain and wood in exchange for his wool.

Leap forward many years, and man invented an abstract form of currency. Maybe it began due to seasonal demands - if grain was harvested and available only in a part of the year, then the farmer needed to have some means to sell it, and then get wool later in the winter. This was made possible in the form of coins, and later joined by notes to form money. So far, so good. Each person had an honest commitment to create the best quality of good to provide to get the most money, so they could afford the best for themselves and their families round the year.

Then came other abstractions of value, further removed from money, to make money. As different technologies became available to improve the productivity in each field of work, people began investing in others' skills. Thus was invented an early predecessor of the corporation. A wealthy investor would invest in farming equipment and land and have skilled farmers do the farming so as to produce more than a farmer would be able to afford at a smaller scale on his smaller piece of land. At this point, the investor still had an interest in ensuring the best quality of output from his land and workers, as that would earn him more money, and things were still reasonable.

Competition emerged as societies grew and multiple people provided the same service, and it became crucial to differentiate one's produce from the other's. This could be done by providing better quality than others or by providing the same good for a lesser price. There was only so much that one could do in increasing the quality, especially in mature industries. Only a small percentage of attempts at innovation succeeded, and cost of researching new innovations was exorbitant. Also, price cuts also had a limit before effecting huge losses.

Then, a brainwave came to the rescue, probably encouraged by newer and wider reaching faster means of communication (printing, radio, telegraph, tv, and more recently the internet). People were excited by the power of the new media, and were easily influenced by what they heard, read and saw. Advertising and other forms of marketing were born. Every available medium of the time was used to bombard the user with marketing messages. At some point, investors and executives at the companies realized that this was way more effective than either innovation or cost cutting. Investments shifted dramatically towards marketing and less and less was spent on innovation. The users were kept mesmerized by well concealed rhetoric and flashy glamorous advertisement. Brands took over the product. It became hard for the consumer to know what value really lay in a product, and they were systematically hypnotized into choosing brands instead of what they needed. Money was spent based on what they knew about the brand, and what they had heard about the product, and (granted, in an oversimplified view,) the ones with the most advertising budget won the customer. So this was the beginning of the downfall of value, but it had only just begun. The handful of customers who were able to lift their head above the din of the blasting marketing messages could see that things werent quite as good as they used to be. There were many more choices, many more new things, but none of them had the rigorous dedication to quality and providing value that had existed in the past. From the company's angle, now all that mattered was how frequently they could bombard the world with messages of innovation and messages of value, and deliver something that the world would relate to the messages. So, there was a rush to produce things in shorter and shorter times. While some pride our current times and the rapidity of churning out goods compared to the past, few seem to notice the enormous compromise in quality that it brings along.

Now there were hundreds of companies creating similar things, and everyone got wise to the marketing and rapid delivery formula. They needed other ways to get ahead of their competition and make money. Another ingenious idea hit the world, protection of assets - in the form of patents, copyrights, trademarks. The ingenious inventor of this idea probably thought: if I can get the law to support me, and prevent competitors from building anything I build, then I can reap the benefits of my idea without my competitors eating a free lunch off of it. Probably a reasonable thought, even when stated as above. However, it didnt quite stop there. This whole notion of protection of intellectual assets went overboard - people began to patent everything from words and phrases to wild herbs to the blue sky (not sure of the last one... yet) and that wiped out the ability of anyone to do pretty much anything new without violating some patent or copyright. Innovation and creation of value was almost dead.

Now, quality dropped so low that people were taking notice. They whined to the corporations, and the corporations who were now wizards in the craft of converting anything into money, found a way to make money off of that as well. The amazing solution was a support contract. Pay me oodles of money in addition to what you pay for what you buy, and I will fix your good even after you bought it. And then, for added good measure, the companies spent a lot of money marketing the support contracts as well. People were too dazed at this point to realize that the same company that did not want to spend upfront in providing high quality in the product would not be particularly interested in investing in excellent after sales support. They went out with a pleasant smile and paid , oh, I don't know, 20-40% more, for the same good. And what did they get when the good went bust? They got to call a toll free (yes absolutely toll free!) number. First off they are met by an automated system that proffers several advertisements, other ways to get help, and upto nine options, none of which match the problem at hand. If they were lucky, they would have a way out of the automated system, and if they had an IQ of over 6000, they would find it, and then, after a sunny afternoon spent listening to classical music interspersed with more ads, they would finally get connected to someone in a rural extremity of a yet unnamed country somewhere out there, where only the supervisor's supervisor would speak some dialect of english that they could understand. After a long delay answering questions involving personal identification including birthmarks in private areas, and (finally!) describing their problem, they would, in many cases, be politely directed to the fine print in the contract that excludes this particular issue. If they called hardware support, they would be told to contact the software company, and vice versa. They would then likely bang the phone down in frustration, and then have to call the phone company support to fix the phone, and the experience would repeat. Now, initially this was met with a lot of indignation and hullaballoo, but eventually people begin to accept at least at some subconscious level that they are decidedly inferior to the corporation as an entity in society.

Some people did whine and were hit with another brilliant rebuttal. Companies were now, routinely owned by people, and most of the large companies were owned by the public. So, if you did manage to bring this up to a company, this is what would happen: In an unstated, but pointedly implied moral argument, the company would shrug (assume for a moment that a company can, somehow, shrug, as well as argue), and argue that their first allegiance is to the shareholders, the common people, in other words, people like you. What would you say to that? Maybe you do own some shares in the company, and so you choose to shut up. So, the shareholder comes first, the company growing and expanding comes next, marketing and advertisement campaigns come third, patent and legal patent related expenses come fourth, and somewhere down towards the end of the priority chain, comes the customer, probably just above the money spent on support costs, which is the biggest overhead. But then that doesnt seem obvious, because at every higher priority point, the customer and the value provided is mentioned as the most important priority - be it to the shareholders, or in the advertisement campaigns, or while filing for a patent.

And then, as always, everyone caught on to all that, and yet another epiphany entered the mix - after making all the money people are willing to pay for exquisite fantasies (ads), mediocre products, and horrible support, the next mantra was, money for nothing! And this happened in various forms, and arms were twisted hard to make that the only choice. If you think I am talking about someone else, I am referring to anything where you pay a monthly subscription for a sparingly used service. A wireless plan with a two year agreement, a cable tv package, a monthly minimum phone bill, a gym membership where the cost of reenrolling if you take a break is exorbitant. In all these cases, a person from a hundred years ago would probably laugh at you if you offered one of these as an option. However, today, more and more offerings are moving towards this model. Companies realize (duh) that free money is the best money, and would love to get as much of it from you as they can. They have again, invested strategically, to find ways to make this the only reasonable option, by making other alternatives exorbitantly unaffordable. For instance, everytime I used to call my cell phone company, they would talk about this great offer of so much off, free candy, something, if I agreed to a) get a new line with a two year agreement , or, once they realize I'm not that stupid, b) renew my almost ended contract for another two years. And that adds even more incentive for the product development side of the house to avoid thinking about value. If all the customers in my market segment are tied in to a hundred year agreement, to the full extent of their salary inflation adjusted to account for future pay hikes, then I can pretty much stop investing in developing new products, or, if that seems too drastic, move the development to a smaller rural district in that unnamed country down the road from my support office. Can't I?