Covid Notepad 3…plus a comment on Brexit

If there was one thing that was certain to flow from the Covid-19 pandemic, it is the volume of fascinating new research into the way people and governments react to the danger that the virus creates.

You may recall that early on in the crisis there were dire predictions of breakdown in the health systems’ ability to cope with ever-increasing numbers of infected patients.  The UK government was reportedly swayed by some damning projections from the ‘Royal Epidemiologist’ at the Imperial College London using their proprietary model.  The model, subsequently, was found to be full of programming bugs, poorly documented, enhanced by piecemeal and elementary in construct. Desperate times call for desperate measures but they also call for an intellectual upgrade in understanding societies’ reaction and policy options.

Here are some constructive discoveries from mathematicians and statisticians around the world…

  1. Ghader, Zhou, Lee, Zhou, Zhao and Zhang (“Observed mobility data reveals social distancing inertia” 2020) got some data on human mobility in the US from mobile phone companies on a mass, anonymised basis.  They calculated the number of trips and average number of miles traveled each day by each person (i) before the onset of the epidemic, (ii) immediately after it became news but before government lockdowns etc were ordered and (iii) after lockdown. They find that not only did the population cut their trips leaving home by 50% when the emergency became news in March 2020, this voluntary ‘social distancing’ took place before any government regulations were imposed.  They further find that the voluntary distancing reached a new average level after 2 weeks and subsequent attempts by government to further limit movement proved futile. The bottom line is that individuals reacted  faster and voluntarily to the Covid epidemic, while policy makers were late and ineffectual
  2. Elie, Hubert and Turinici (“Contact rate epidemic control of Covid19: an equilibrium view” 2020) build on these observations, delivering an elegant upgrade to the standard SEIR model used by the likes of Imperial College.  They posture the common externality where individual action has no marginal effect on virus transmission whereas collectively it does. That is, if I lock myself in a room I dont get sick, I bear a lot of cost BUT the virus rages on outside without me.  However, if everyone locks themselves in a room, we all avoid sickness and suffer costs BUT the virus is eradicated.  In their framework, there is an incentive to self distance voluntarily to not get sick and this naturally spills over to the aggregate endogenously, thereby reducing the spread of the virus.  Their numerical simulations suggest that the probability of infection falls to 62% from 80% in the standard model. They go on to introduce a powerful government to stamp out the virus.  This imposes almost double the social costs on society. The bottom line is that social distancing is a logical response to an epidemic thereby attenuating the viral spread while government restrictions are not very well appreciated by the population.

…a comment on Brexit

Governance, dispute resolution and fisheries, we are told, are the 3 issues impeding a cooperative Brexit. Lets deal with each issue simply and realistically.

Governance refers to who controls the quality standards applying to the exchange of goods and services.  The EU wants the UK to follow their standards.  The UK, on the other hand, wants to set their own standards, be they higher or lower than the EU.  It is hard to imagine a compromise on this question since this is the whole point of leaving the EU!

Dispute resolution refers to the jurisdiction that has authority to mediate a dispute.  The European Union wants the European courts to have jurisdiction while the UK wants UK law to apply.  It is hard to imagine a compromise on this question since legal sovereignty, again, is the whole point of leaving EU!

Fish.  British waters are home to fisheries that the EU want access to FOR FREE.  Again, the whole point of leaving the EU is to regain ownership and control of your resources.  The obvious compromise in this disagreement is for the UK to charge the EU for access to British fishing grounds.

Put simply, Governance and Dispute Resolution are the two ‘biggies’ that have no other solution than abandoning the Brexit idea altogether.  The EU and the UK should just accept this and let competitive forces determine the outcome.  The market mechanism has its own way of deciding on quality standards (the economics of price and cost) and dispute resolution (contracts specify the jurisdiction that will apply in the event of a dispute).  After 4 years of ineffective government attempts to fulfill the UK’s decision to leave the EU, finally the market is set to take over.  The market mechanism will quickly and efficiently find a way.


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An FDV threeway: Swinging in Saudi Arabia…plus Our UK Election Special…plus the latest release from DJ Dr Fish

Swinging in Saudi Arabia

ARAMCO officially listed yesterday.  The Saudi owned company is the world’s largest oil producer, world’s largest company … the world’s largest many things.  It has played a political role, a diplomatic role and a world economic role for many years as the ‘Swing Producer’ in the oil markets.  Swing producers have the capacity and substance to stabilise oil markets should there be short term fluctuations in supply.  Swing producers can also act as policeman to a price-fixing cartel such as OPEC.  Swing producers, it is fair to say, may not necessarily act to maximise profits, especially when it belongs to a Sovereign entity with many competing objectives…

…but now that ARAMCO is a listed entity does this change?  The starting point for a public company is to maximise profit and it is not clear that ARAMCO’s activities to date have had that objective.  Cartels, such as OPEC, aim to control the supply of a commodity in order to fix a price that will benefit all members in terms of higher revenue.  That price is typically way higher than the marginal cost of producing the commodity so there are clear incentives for one or more members of the cartel to chisel away at their production quotas, selling more oil than they are permitted for profits at the expense of other members.  Cartels are inherently unstable, therefore, and it is the role of the Swing Producer to bring discipline to its members.  In this way, the Swinger is not acting to maximise their own profit per se, rather they are bearing the cost of policing other members sly activities.

Public companies are not meant to engage in price-fixing arrangements, collusive anti-competitive behaviour nor any supply manipulation.  On the face of it, however, ARAMCO’s raison d’etre has been all these things.  Owing to its  ‘strategic global importance’ ARAMCO will get away with all these activities as the global regulators turn a blind-eye to it all.  ARAMCO’s shareholders, however, may think differently.  While the non-government shareholder register represents only 1.5% of the stock, they will want their rewards – as either higher dividends or higher stock prices.  This may force ARAMCO to abandon their Swing activities and, quite possibly, become a source of instability themselves.

UK Election special: Money v Mischief in the UK Brexit Poll

Speaking of cartels, the UK is going to an election om December 12 to break the impasse caused by the UK parliament’s inability to follow a simple instruction.  In 2016, the UK’s electorate decided to leave the European Union, a particularly vicious cartel that favoured members such as France, Italy and Germany over others such as the UK.  Breaking the cartel seemed, on the face of it, the right thing to do.  But the UK’s government has had difficulties letting go of the security blanket and their Whitehall bureaucrats got busy negotiating a ‘Claytons Brexit’ – an expression for the Brexit you have when you are not having a Brexit.

Frequent readers will be aware of my ‘Money v Mischief’ theory of voter behaviour.  Basically, the ‘thoughtful swinging voter’ make their mind up only when they reach the polling booth and they do so based on (i) how much money they expect to make from each party and (ii) how much mischief they can cause within their own parliament.  On this basis, the Labour Party in the UK might well surprise with their pork-barrelling of promises such as free fibre internet for everyone.  The mischief vote goes squarely to Boris Johnson who, despite being a career politician, candidly expresses his impatience with the talk-but-no-action that is modern democracy.  Sadly for the Liberal-Democrats, they offer neither money nor anything other than ‘good policy’ which, irrespective of its content, is pure boredom.

So on this basis, my prediction for the UK elections are

(i) The Liberal Democrats get decimated to the point of extinction

(ii) The Conservatives easily obtain a majority as the electorate send a message to the parliament to just get Brexit done

(iii) The Labour party pick up the Lib-Dems losses


…and finally, check out the Christmas Album from DJ Dr Fish

The latest release does NOT have any of the songs that your DONT want to hear at Christmas.  Just 63 minutes of relaxing, progressive trance.

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Brexit: non-market breakdown…

Here’s a riddle.  If the solution to market-breakdown is regulation, what is the solution to non-market breakdown?

If ever there was a demonstration of the inability of Government to plan, decide and execute a simple instruction it is Brexit. The UK referendum instructed the Government to leave the EU cartel.  The rights and obligations that European and UK governments, corporations and citizens under the cartel agreement were therefore to be abandoned.  Whatever fills the void and however the economic relations between the EU and UK proceed in the future is to be determined…but by whom?

Not surprisingly, the GOVERNMENTS of both the UK and the EU think that their role is to construct an alternative legislative framework to replace the existing cartel. This is rubbish and they have misunderstood entirely the economic forces that decided the referendum.  When a cartel breaks down, which cartels tend to do, the economic solution is not to try and patch it up.  Cartels are bad for many and only good for some. The competitive pressures that chip away at the cartel’s stability, have at their basis a better solution.

The proper role for Government is to facilitate this better, more competitive solution by discarding the protected waste and facilitating the more open, freer trading environment that Brexit stands for.  Neither the EU nor the UK Governments understand this basic fact.  These institutions operate non-market bureaucracies that are incapable of relinquishing control. Worse they think that the cartel is fundamentally good, so if one rule is abandoned then it must be replaced with another rule to achieve the same thing.

One ‘sticking point’ in the negotiations, for instance, is whether Ireland and Northern Ireland should have a hard or soft border? This is really dumb, completely irrelevant and anti-competitive. Market forces don’t care about imaginary borders. Market forces just want to do business.

The Brexit negotiations are being undertaken by non-market people from non-market institutions.  The World is witnessing arguably the greatest example of Non-Market Breakdown ever in economic history.

So what is the answer to the riddle? The Market, of course.


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Pragmatism and compromise in Brexit

“In the referendum on 23 June 2016 – the largest ever democratic exercise in the United Kingdom – the British people voted to leave the European Union…

…But to do so requires pragmatism and compromise on both sides.”
UK PM Theresa May in the foreword to the White Paper on the Future of the UK’s relationship with the EU, July 12 2018.

TWO years after the UK voted to exit the European Union, they are still there. How can this be? It seems that the same non-market forces that created the EU cartel have taken control of the Brexit thing.

Were it left to market forces to guide the exit my guess is that,

1. The exit would have been completed by now; and
2. Profitable trade links would remain and the bureaucracy ditched

But it’s not up to the market to decide what to keep and what to cut. The clearly visible hands of the non-market appointed negotiators have taken a simple problem and complicated it. Theresa May’s statement above is classic professional politician inertia and the entire document is poetry as opposed to science, but I particularly like the reference to ‘…pragmatism and compromise…’ for the following reason:

Free trade entails loading up a container with stuff and sending it to somewhere to people who want it. Finding customers and delivering a product at a price which satisfies each party to the transaction – buyer and seller – is the ultimate expression of ‘…pragmatism and compromise…’. Ironically, Mrs May hit the nail on the head – leave it to the market! – but she neither understands it nor did she mean it.