What is the function of advertisement?

The function of advertisement is simply to help companies to earn more revenues. To earn more revenues has two ways: the first is to attract more people to buy, the other is to convince existing customers to accept higher prices. Previously I argued that customers might not have exact figures about their expected utilities for particular products including both goods and services, so the customers could usually accept a range of prices with different probabilities for different prices. Therefore, under such hypothesis, the function of advertisement is to increase customers‘ probabilities to accept  higher prices.

To convince customers’ probabilities to accept higher prices can both to increase the number of potential customers and to increase existing customers’ acceptances of higher prices. The most important reason for people not buying goods or services is because they do not accept the products’ prices. When advertise is effective to increase people’s probabilities of accepting higher prices, it means two things. For higher prices, people are more likely to accept the higher prices, implying existing customers are likely to be willing to pay higher prices; on the other hand, at a particular price level, more people of the population are likely to accept this particular price, implying more people are likely to buy the products given their prices.

Based on this hypothesis, all advertise should aim to increase people’s acceptance of higher prices, this applies to all kinds of products and services, not only when advertising luxury products. When increasing people’s acceptance of prices, even when the prices do not change, more people are likely to buy the products, as more people become willing to accept the prices.

US trade deficit in its decline

The US international deficit is reported to fall by nearly 1 billion dollars since July, though the exports have been impacted by Hurricanes Harvey and Irma, as the ports were damaged. As the American current account is improved by the increased volume of exports, showing the strength of American products including services still have their comparative advantages and maintain competitive in the world market. In addition, due to the damage dealt by the hurricanes, both exports and imports are very likely to be significantly lower than the normal standards.

In addition, when the US government officially lowers the cooperate taxes, the costs of productions for many American exports would reduce further, this would potentially increase exports and lower imports, as the prices for goods and services produced within the US could be lower as the costs lower. Therefore, from this perspective, the US international deficit will keep dropping especially when the US government officially starts its tax cuts.

However, it does not mean that there is no downside for the US exports. Firstly, once the US tries to improve its products' competitiveness in the global market, other countries will do something similar or even more powerful and radical, this could reduce the comparative advantages of some American products. Secondly, the countries may have significant improvement in their comparatively advantageous sectors or sectors where the US has comparative advantages, for example, according to JD Power, Chinese car-makers close quality gap on foreign rivals. When other countries try to close comparative advantages held by the US companies, the US exports may reduce. Thirdly, the political environment is something that cannot be ignored when considering the global trading. Politics is always adding uncertainties to the world economy as well as the global trading network. Therefore, the US exports as well as imports could go both directions due to the political uncertainties.

Overall, within a stable global political environment, the US international deficit may continue to decrease, when the US government is giving more benefits to the US companies.

Value of land

Big landlords have often been attacked by left-wing politicians, as they are considered to be too wealthy and powerful to make resources and wealth flow across different classes, leading to a reduction in people’s incentives and productivity. Therefore, the wealth and land owned by big landlords should be given away at least partially. In China, individuals do not own private land, all land belongs to the state. Ownership of land could sometimes provide incentives for some people, as they could have goals such as owning some private land after retiring from their hard-working careers. Therefore, giving ownership to individuals is not something that could hurt the society. I also believe that the values of land would become decreasing over time. 

In modern eras, people are able to use land more effectively, as we build sky-high buildings, so we are able to locate more people with the limited land. In addition, the value of the land without natural resources is also dependent of the distances to key locations. However, when the speeds of transport and communication are increasing, the values of location decrease over time. In addition, it is also possible for our human beings to have more land in the future if we can actually conquer the Mars.

As the functions of having land is to collect resources from land, to have living room, to be close to key resources, when the functions are weakened, the values of land will keep dropping. The current housing price rise is still caused by relatively poor technology (in transporting and communication) and the high rate of population growth; when the population growth rate drops and our technologies develop further, land will not be valuable resources any more and the value will eventually drop.

Products with low marginal costs

There have been many products with low marginal costs, especially in the E-entertainment field. These products, especially those with high qualities, have huge lump sum costs for their research and development sectors. These companies could be considered to have higher risks as well as higher returns to compensate the high risks, they cannot efficiently reduce costs by reducing production when they find sales do not perform well and they are also able to boost their profits as they do not need to spend a lot on increasing their productions.

However, this is not necessarily true. Although it may not require many resources for further production, it does not mean there is no extra expenditure after the product is innovated and produced. For example, its spending on the advertisement could be correlated with its sales, Tencent has spent billions on advertising its most popular game, League of Legend, in order to gain the current popularity. Moreover, there is another field that companies need to spend: anti-pirate. Because of the low costs of production, it is easy to be copied and private versions could flood the market and take profits from the companies. Therefore, the companies have to put many resources into anti-pirate actions. In addition, they also need to product add-on products in order to attract more consumers.

Overall, those companies, whose products tend to have extremely low or even no marginal costs of production, are bearing high risk; therefore, I do not see them as good investment opportunities, unless they can effectively avoid pirates and dominate their own markets.

Moving forward or staying in the safe zone

Especially when Trump decided to pull the US out of the Paris Agreement, the US seems to stay conservative and want to maintain its advantages and strengths in the coal industry. The US President Trump in many occasions promised to the coal workers that he would bring back jobs for the coal workers. However, from the entire world economy or technology development, there is a trend that sustainable renewable energy is going to replace the traditional fossil fuel. Such circumstance also happens in many other sectors when those who stand at advantageous positions have higher opportunities costs to adopt to new technologies as they need to abandon its existing advantages and bear the risk of not gaining advantages in new sectors.

The ones with existing advantages and strengths do not always have advantages over other small opponents, as they are too big to be flexible and adopt new technologies or strategies. This problem is even more obvious in the infrastructure building. In many developed countries, they have relatively poorer infrastructure. In the US, the New York City’s underground system is relatively poor and is not the first choice for many citizens in the city. Though in London the underground system is the first choice for many people, the room of the trains is tiny and there is no network (though recent years the stations have public wifi hotspots).

However, in some countries which recently develop including Japan and Singapore, the infrastructure is much more modern, Even Germany could be counted as such country, as its old infrastructure had been largely destroyed during the second world war, its current infrastructure was built after the second world war. For those developed countries with complete transport and other infrastructural systems for long time, they are struggling to make decisions on whether or not they should upgrade their current systems, as the costs are incredibly high and there is some risk that the current available systems may need another upgrade after they adopt the new system. In addition, many of these countries have large expenditures on other fields, including education, national defence, welfare system and etc. Furthermore, upgrading infrastructure have long term and moderate impacts; however, there are some fields that can immediate and crucial impacts, the electoral political system makes politicians prefer those immediate policies rather than long term policies. Therefore, the decision of upgrading infrastructural systems is hardly made by the politicians in these developed countries.

Uber in London

Uber will lose its license in London by the end of this month. Although Uber has said it would repeal, I do not think Uber would earn back its license in London. Uber was a tech company that aimed to share people’s cars when they are not occupied. However, Uber has already turned to become a taxi company. This is how the London Public Transport Authority has control over Uber’s cooperation in London.

The reason for Uber becoming a taxi company is because it violates one rule of sharing cars. Uber does not only occupy people’s cars when they are not using their cars, but also occupy people’s time as well. However, the principle of the labour market is people selling their time to companies; therefore, Uber starts to occupy people’s time, it indirectly pull people back into the labour market if they want to sell their excess capacity of their cars. At most time, when people are not using their cars, they do not like sacrifice their luxury time for working in the labour market again as well. This makes many people do not have incentives to joining the car sharing program created by Uber. Thus Uber started to hire professional Uber drivers to drive taxis across cities. 

I think that Uber may become more successful when people can separately sell their free capacities of their cars and their free time that people can let others drive their cars for taxi business when they are not using their cars and the earnings can be split between car owners and drivers. Of course, insurance companies can also step in to provide insurance for inappropriate use of cars to lower the risk of car owners lending cars to others.

Entrepreneurship and resource allocation

I have repeatedly argued that entrepreneurs are merely those who help to improve the efficiency of the resource allocation in the market as well as the economy. Excellent entrepreneurs are those who are the best at reallocating resources. Today I would like to further discuss how entrepreneurs help to improve the efficiency of resource distribution in many different situations.

The most obvious situation is when the owners of a company is seeking new managers to manage their companies. Good managers are believed to be more able to generate higher returns and greater profits. The ability to achieve such goal is to redistribute the company’s resources more efficiently, better efficiency means resources are able to have greater marginal returns.

There is a less obvious way to see entrepreneurship’s function in helping to improve the efficiency of resource allocation, which is when entrepreneurs also play the role of innovators and start businesses in a whole new sector. For example, the case of Elon Musk and his SpaceX is such situation. However, under such circumstance, we can see entrepreneurs reallocate resources from our entire economy in a completely new sector where resources are able to generate surprisingly high returns. Entrepreneurs here can be seen as the entrepreneurs who have less traditional ideas about allocating resources but innovative ideas about where to put resources. 

However, some people may feel confused that they may think bankers are bankers or investment managers who are also helping to allocate capitals. However, allocating capitals and allocating resources are not entirely the same, as capitals are only part of resources.

Overall, anyone with abilities to allocate resources efficiently can be a good entrepreneur. 

The US Fed’s plan to end its quantitative easing program

The chairwoman of the US Federal Reserve, Janet Yellen, said today (the 20^th September) that the US Federal Reserve would shrink its balance sheet to reduce its asset holdings. It will speed up the rate of the global ending quantitative easing, followed by the plan to end the quantitative easing revealed by the president of the European Central Bank, Mario Draghi.

Of course, to end the quantitative easing programs cannot be done within a few months, it will takes several years, especially when multi-trillion dollars worth assets are currently held by the US Federal Reserve. Similarly, the European Central Bank also needs several years to end its quantitative easing program.

During the next several years, the central banks in many major economies tend to cut their asset holdings and raise their base rates. Today’s Fed’s announcement rallies the US dollar to appreciate, this means the Forex market expects that the end of the quantitative easing program will bring down the inflationary pressure, which helps to appreciate the exchange rate. In addition, the rally of the US dollar may show that the financial sector still holds confidence about the US economy after the end of the quantitative easing program.

In addition, many of other countries which are still having expansionary monetary policies may also follow the paths of the European Central Bank and the US Federal Reserve to start cur their expansionary monetary policies.

Capitalist and entrepreneurship

Capitalists and entrepreneurs are often considered as the same group of people, and they are often considered as the wealthy classes. Borrowed from what is said in Marx’s “Kapital”, either capitalists or entrepreneurs are those who exploit the working classes. However, the two terms are different and represent their different contributions to the production. Capitalists provide capitals for the process of production and entrepreneurs provide entrepreneurship (including management) for the process of production. There is a reason for the confusion about the two terms. Firstly, nowadays, many capitalists especially those well known capitalists earn their first bucket of gold by their excellent entrepreneurship, so when they become wealthy capitalists, they are also known as famous entrepreneurs. Therefore, when the famous entrepreneurs are also capitalists, people become confused about these two terms.

Capitalists do not need to manage companies that they invest in; however, capitalists are required by our economies, since in the modern era, the investment has become more crucial as the amount of capital required for production becomes greater. Unlike entrepreneurs, capitalists do not necessarily involve in the production or the economy by themselves, they can find wealth managers to manage their capitals and generate even more capitals. In addition, if we believe our economies are growing forever, large capitalists can always earn more capitals as long as their investment portfolios cover large numbers of sectors.

On the other hand, entrepreneurship is always important in the process of production. Entrepreneurship is a process of allocating resources in order to improve the efficiency of resource allocation. Even those entrepreneurs with new ideas, they are just entrepreneurs with new ideas about how and where to allocate resources.

Therefore, capitalists are those who add fuel to the economy to generate productions and entrepreneurs are those who drive the economy and manage the fuel more efficiently.

Brexit will become a standard for the coming world foreign policy

Brexit has been relatively unpopular among the European area, even within the UK, there have been many different opinions surrounding the issue of Brexit, from whether or not to leave the EU to how to negotiate with the EU parliament. However, undoubtedly Brexit is one of the most crucial events in this twenty-first century. Many people see this as the turning point from globalisation to deglobalisation, but I have a different opinion that I think Brexit will set a new standard for the future worldwide foreign policy.

The reason for Brexit not being a turning point of deglobalisation is because the foundation of the European Union is not necessarily a movement towards globalisation. There have been some scholars and economists believing that the formation of the European Union is a geographical isolation that to unite European countries to fight the rest of the world in terms of politics and trades. Brexit could be seen as a movement that brings Britain away from uniting with other countries (which is a process of deglobalisation), but it could be seen as a movement that Britain leaves the European Union and rejoin the global entire economy (which is a process of globalisation). Therefore, Brexit could not be simply seen as a turning point of deglobalisation.

The reasons for me to see Brexit setting a new standard of the future worldwide foreign policy are the followings. Firstly, when transport has been faster and easier than decades ago, the cooperation between countries has been expanding outside their traditionally geographical regions. Britain is currently leaving its traditionally geographical allies and seeking new trade partners globally. Many other countries may follow Britain to leave their current geographical trade deals and seek more trade partners, including Japan. Secondly, Britain is restructuring its foreign policy, and many other countries may need to do something similar in the future. When the US is starting more and more disagreement with its traditional allies, American allies may want to change their foreign policies and become less dependent of America. In the future, countries need to have their specific foreign policies and cannot rely on one or two stable allies, as such alliance could become quite vulnerable. Actually even if Japan wants to become normal countries again, it has to get rid of the influence from America. Thirdly, the trade negotiation after Brexit could set examples for some countries which seek trade deals without forming some political alliance.

Overall, I think that Brexit will set a standard for many countries’ future foreign policies.

Why are attackers at stronger positions than the victims?

Today, another terrorist attack hit London tube system again. There have already been several terrorist attacks around the world. People do not only face the threat from terrorism, but also face threat from serious crimes (robbery, murder). Usually we often find victims are always dominated by the attackers or terrorists.

Of course, criminals and terrorists often choose their targets carefully in order to ensure they have the power to dominate their targets. However, in some events where the two sides seem to have similar strengthen or power, the attackers still seem to dominate the victims. This is because the two sides have different preferences thus choosing different strategies.

When a person notices that he(she) is about to be attacked, his(her) preference makes him(her) perfect being unhurt over defeating the attacker. As the priority of the potential victim is to stay unhurt, this individual tends to escape rather than to attack back. The probability of getting hurt is much higher when attacking back than the probability when trying to escape, as getting in physical contact is more likely to be hurt even when the strengths of both sides are similar. Especially when the number of potential attackers is significantly larger than the number of attackers, the probability of getting hurt when choosing to escape is fairly small. Moreover, in modern eras, the information asymmetry also plays a significant role when potential victims are making their emergent decisions. The possible weapons that the attackers hold are more various than decades ago, to the attackers, the information about the victims is almost completely obvious and transparent; therefore, it is much less risky for attackers to attack victims than for victims to face attackers, due to the information asymmetry between the two groups.

Therefore, when facing criminals or terrorists, potential victims automatically become the dominated and vulnerable group that even giving them any sort of training or education is not going to change such position.

The end of expansionary monetary policy era

Today the Bank of England sends a strong signal on rate rise, and earlier this month, the chairman of the European Central Bank also made an announcement of possible end of the asset purchasing program. The US Federal Reserve has already increased its rates several times. The world economy seems to enter the era of the end of expansionary monetary policies.

The end of expansionary monetary policies is caused by several reasons. Firstly, the central bank believes there is high inflationary pressure in the economy, stopping expansionary monetary policy can lower the inflationary pressure in the economy. Secondly, when the central bank believes that there are too many bubbles in the economy. One of the functions of the central bank is to stabilize the economy. Usually the economic growth is too strong ,it may imply when the recession hits the economy, its damage could be more harmful. Therefore, the central bank tends to stabilise the economy and maintain the growing trend but reduce the volatility in the economy. Thirdly, when the central bank feels continuing expansionary monetary policies ineffectively improve the economic performance, the central bank could stop its expansionary monetary policies in order to improve the efficiency of the use of resources. Fourthly, when the central bank feels satisfied about the improvement made by the expansionary monetary policies, they will stop the expansionary policies and leave the economy to the market without any further intervention.

The possible end of the ECB and the BoE's monetary policies may be caused by the central banks feel continuing expansionary policies will not further improve the economic performances. The economic growth rates of Britain and the Eurozone are still relatively low. Though the inflation rates tend to rise, the rates are not yet rising far above 2.0%, which is usually the target set by the central banks. Therefore, the decision of stopping expansionary monetary policies is made based on they want to prevent inflation or strong volatility in the economies.

Once the Bank of England and the European Central Bank finally stop their expansionary monetary policies and start to rise rates, it may immediately cause a shock in the financial markets in Europe. The costs of borrowing in Britain and the Eurozone will increase and some companies may find themselves seeking financing becomes more costly and difficult. The economic performances may become weakened. However, it may reduce the increasing bubbles in the economies and give more room to the central banks when they are dealing with the recession in the future.