Book recommendations (in no particular order)

• Anti-Fragile , by Nassim Taleb (also Fooled by Randomness, Black Swan)
• Randomistas: Fighting Poverty with Science  by Esther Duflo
• Rationality: What It Is, Why It Seems Scarce, Why It Matters  by Steven Pinker
• Enlightenment Now: The Case for Reason, Science, Humanism, and Progress by Steven Pinker 
• Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are  by Seth Stephens-Davidowitz
• Prediction Machines, Updated and Expanded: The Simple Economics of Artificial Intelligence  by Ajay Agrawal , Joshua Gans
• Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley, link
• Amazon Unbound, Why is Bezos such an Extraordinary Manager?
• Randomistas
• Algorithms to Live By
• Factfulness
• The Art of Strategy
• Shoe Dog
• An Economist Walks into a Brothel
• Sapiens
• Dataclysm
• Rising Strong (squishy, but good)

NPR: Cobalt is important for green energy. So why has America's only coablt mine closed?

https://www.npr.org/2023/12/14/1219246964/cobalt-is-important-for-green-energy-so-why-has-americas-only-coablt-mine-closed

HT:  Brie

(Lack of) Barriers to Entry in Beer Brewing

More commercial insights are forthcoming from "Grain and Beer" episode of The History of the Germans podcast. Unlike most crafts, any household could brew beer. But since not everyone could brew it well, towns set out to regulate it by limiting the number of houses where it was allowed. Fortunately, the number was set high enough for competition to thrive.

Since there were no guilds, the way the cities tried to control the production and to maintain standards for health and safety was by restricting the number of houses that were allowed to make beer. Hamburg for instance had 500 houses where the making of beer was allowed. If someone wanted to become a brewer, he did not have to marry some brewer’s widow, schmooze the guild masters and pass an examination, what he or she needed to do was buying one of the houses where brewing was allowed. That is why you often find breweries in Germany being called “Brauhaus” meaning brewer’s house, referring to the physical location where brewing was allowed. 

Hanseatic beer used hops with its distinct taste but also acted as a preservative. This allowed it to be exported even at exorbitant transport costs. 

... Einbecker Beer was famous across Northern Europe and was drunk as far north as Bergen and Stockholm, another 900km onwards by boat. Why would people pay 5X for the imported version of a daily staple? Something they drank more than 200 litres each per year.

Our pod-caster, the erudite Dirk Hoffman-Becking, claims that German brewers convinced far flung Europeans that their beer was a luxury good that signaled the status of its consumer. I conjecture, without evidence, that setting a low entry barrier and mild standards regulation generated competition that kept production costs down and product quality up. One need not be a beer snob to appreciate an objectively better product not available from locals.

The Hansa as a Brand

The History of the Germans podcast I have been enjoying has just gotten to the Hanseatic League, the trading network dominated by the Germans that came to dominate the Baltic and North Seas in the high middle ages. One the first trade routes was to the then important trade center of Novgorod. A curious question was why this network was so successful. There appear to be a number of factors but one important one has to do with developing a brand to signal quality that ameliorated asymmetric information problems.

And we get another crucial element, the commercial discipline and branding. If you came to Novgorod on your own, assuming you made it at all, it would have been very difficult for you to sell your wares at a good price. Your clients will ask: Is that cloth you sell really the high-quality material from Bruges and not the cheap stuff from Ypres? That salt, could it be mixed with something? Where do I go when I have a complaint and you have gone home?

The brand was supported by an effective governance structure for the traders visiting St. Peter’s Yard in Novgorod.

The members of the St. Peter’s Yard maintained or at least pretended to maintain strict discipline amongst their ranks and if one of their customers had found themselves cheated by one of these merchants, they knew where to go for redress. This created what we would today call a brand. Merchants who came with that fleet became seen as trustworthy. They may be a touch more expensive, but you get what you were hoping to get.

AT&T's Shift in Supplier Strategy

AT&T made a major shift from a single primary supplier of proprietary network infrastructure provided by Nokia to an open radio access network (Open RAN) to handle most of its US network traffic by late 2026.

Open RAN is expected to bring several advantages, including reduced costs, increased vendor diversity, and enhanced network agility.

Open RAN is a way to have many different vendors compete for business in the future. What precipitated this dramatic change in strategy? Two possibilities include:

• A long-term contract with single supplier is often a mechanism to overcome holdup opportunities. Perhaps newer technology has made the upstream market develop so that relationship specific investments are less important.
• A clever two-part pricing supplier contract in could have mitigated the effects of double-marginalization. Perhaps this form of contract became unworkable. Or perhaps enough competition developed that the margins are not big enough for double-marginalization to lead to large inefficiencies.
  

South Korea's low fertility rate (0.7) moves it towards extinction

 Via MarginalRevolution:

…South Korea is distinctive in that it slipped into below-replacement territory in the 1980s but lately has been falling even more — dropping below one child per woman in 2018, to 0.8 after the pandemic, and now, in provisional data for both the second and third quarters of 2023, to just 0.7 births per woman.

It’s worth unpacking what that means. A country that sustained a birthrate at that level would have, for every 200 people in one generation, 70 people in the next one, a depopulation exceeding what the Black Death delivered to Europe in the 14th century. Run the experiment through a second generational turnover, and your original 200-person population falls below 25. Run it again, and you’re nearing the kind of population crash caused by the fictional superflu in Stephen King’s “The Stand.”

Why house prices go up

Car Wash Industry Dynamics

"The Economics of Everyday Things" a recent episode on Car Washes. Lots has happened to transform this industry.

•  Growth - The industry is growing fast thanks, in part, to less "home production."

  When we started in— back in 1996, more than half of people with cars in the U.S. reported that they most frequently wash their car themselves in the driveway. Our most recent survey, we’re approaching 80 percent now use a professional car wash.

• Bundling - New technology has allowed new pricing schemes more like subscription services or gym memberships that are likely to increase consumer surplus capture.

We fix a little RFID sticker in the bottom corner of your window. And it knows exactly what wash to get, how often you’ve washed and what vehicle you’re in, any contact information. It’s kind of like a barcode, if you will, for your vehicle. And when you pull up to the pay station the gate goes up immediately.

• Input Substitution - Increasing use of technology has reduced labor costs.

A modern car wash today can be run with three or fewer employees versus having, you know, 12 to 25 at some stores back in the day. In those days, car wash owners were almost like farmers. I mean, you’re always watching the weather. You’re always trying to anticipate what demand is going to be so you can manage that labor expense.

All these changes have manager implications. Growth often allows firms to exploit sale economies. Bundling is easier with multiple establishments run under the same brand. Fewer workers could mean more decision rights to each one suggesting more incentive compensation.

Shirking at Hotels

A new paper by Matthew Freedman and Renáta Kosová titled, "Agency and Compensation: Evidence from the Hotel Industry" examines franchising as a way to motivate hotel managers to limit shirking by their employees. The money quote is actually from the travel magazine Budget Travel in which a housekeeper relates:

I cut corners everywhere I could. Instead of vacuuming, I found that just picking up the larger crumbs from the carpet would do. Rather than scrub the tub with hot water, sometimes it was just a spray-and-wipe kind of day… After several weeks on the job, I discovered that the staff leader who inspected the rooms couldn't tell the difference between a clean sink and one that was simply dry, so I would often just run a rag over the wet spots… I apologize to you now if you ever stayed in one of my rooms. You deserved better. But if housekeepers were paid more than minimum wage — and the tips were a bit better — I might have cleaned your toilet rather than just flushed it.

Since it is pretty difficult to monitor this behavior, you might want to use an incentive contract with employees. To get hotel managers to have a motive to implement such contracts, you might want to franchise the hotels. In a pretty carefully done study, Freedman and Kosová find that, relative to company owned hotels, franchise operations rely more on hiring practices characterized by low initial pay with more bonuses and more merit based pay.

Today's youngsters (under 40) will not enjoy anything like the returns their parents made

From The Economist:

... the four decades to 2021 were a golden age for investors. A broad index of global shares posted an annualised real return of 7.4%, .., global bonds posted annualised real returns of 6.3% ...

That golden age is now almost certainly over. It was brought about in the first place by globalisation, quiescent inflation and, most of all, a long decline in interest rates. Each of these trends has now kicked into reverse. As a consequence, youngsters must confront a more difficult set of investment choices

...these long-run averages are 5% and 1.7% a year for stocks and bonds respectively

Advice to the under-40 "youngsters,"

• Don't hold so much cash, ... "young investors’ preference for cash leaves them exposed to inflation and the opportunity cost of missing out on returns elsewhere." [but money market funds are yielding 5% right now]
• Hold more bonds, ... "...they have a tendency to outpace inflation that cash does not."
• Avoid “thematic investing”, ... "...Niche strategies are nothing new, and nor are their deficiencies. Investors who use them face more volatility, less liquidity and chunky fees.."