Business and Politics

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Salary – productivity – equality

The global scale of modern and digital businesses and their therefrom resulting efficiency is producing a fault line in the economy. From a classical economists perspective, this fault line shouldn’t exist. Every employee gets paid according to their value (productivity) and market forces distribute labor accordingly.Here are two examples that show that in a global digitized world, this falls apart:Is a developer at Meta more productive, because every change they make reaches hundreds of millions of people compared to a developer at a small company only serving a local market? Should only global companies be able to hire the best talents and smaller companies, which includes banks that are mostly focused on national markets, shouldn’t? This raises the question whether only international companies should be able to hire the best employees.
Some products inherently offer economies of scale. That means that a Meta developer’s productivity grows with each user that Facebook or Instagram gains. When it comes to a waiter in a restaurant, the opposite is the case. The better the service, the fewer clients they can serve. But even with efficiency gains, a waiter is only ever going to be able to serve a limited number of clients. As a result, there are 2 types of employees emerging: Type 1: Employees whose productivity grows even if they don’t contribute at all (because their user base grows), and Type 2: Employees whose productivity is limited, no matter how good they are. According to conservative economics, their salaries will behave accordingly creating a rich and a poor class. However, both types still compete on the market place for all goods, from food to sporting equipment, vacation homes, and cars.This comes on top of other market distorting factors, such as public services, in which market failure is prevalent and competitive salaries cannot be paid for many reasons.Many of the current business models are based on this inequality. Delivery drivers are another example. For these businesses to operate, it takes one client class, which has enough money to easily pay for delivery riders while the delivery riders themselves have to live on minimum wage (and sometimes even less) and be far removed from ever being able to use their own service.This leads us to a couple of very important conclusions:Salaries are not related to an employee’s value, which is more determined by the size of the company and user/client base.
Unless we accept 2 classes that are economically very far apart from each other, this division isn’t sustainable. There is just no economic model in which we can unite the ever growing salaries of employees at global companies with the limited salaries of the “working class”. Such inequality has rarely ever ended well in history.An example of this is that around 100 years ago, people ate food that was prepared outside of their home, because the cheapest meal was not one that was made at home, but at a pub/restaurant/public kitchen. It is only in the past 50 years that (especially in the West) eating out has become somewhat of a luxury. Few wait staff can probably afford to eat at their employer’s restaurant regularly unless they get discounts. Unless something changes, this will only get worse.The world needs to find a solution for this “productivity gap”, which is a gap not based on personal capabilities, but purely based on employees’ environment and product.AI and automation have the potential to help, making even the “limited” workers more productive (or eliminating them putting them into more productive jobs). A delivery rider could potentially supervise 10 delivery robots. A waiter could focus on social interactions while an AI takes the order.The question is how these efficiency gains will be distributed. If they are being distributed in form of higher salaries for the people now being more productive, there is hope. If the capital owners take all the gains, the situation will turn catastrophic. Every capitalist supporting the latter option should read their history books to see what happens when the lower classes remain suppressed and suffering for too long.Alternative solutions are not very popular (yet). Unconditional Basic incomes, higher taxes, targeted subsidies could help out as long as societies agree that an unequal world is not a good one. But for as long as everyone in power just tries to win and justify their gain with skill, we are heading for a dark place…

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Let’s talk racism, sexism, and other discrimination

Accepting this simplified reality, allows us to do acknowledge 2 important points.Averages do not allow us to make assumptions about individuals. (I acknowledge the non-binary nature of sex and gender, but for the following example, I will only take men and women into account.) We separate women’s from men’s sport, because society seems to have agreed on this categorization and there seem to be enough physical differences ON AVERAGE between these 2 groups. However, if we take 2 randomly chosen human beings, one male, one female, there is no way to say with certainty, whether one of them is stronger or faster (depending on the sport). So while we may acknowledge a tentative difference on average, we cannot make assumptions about individuals. Even if we acknowledge that there is slightly higher likelihood that one of the two random human beings, the man is slightly faster than the female, we mustn’t act upon it. We need to keep our minds open, because otherwise, we would be wrong too many times.It should be said, that for many categorization and stereotypical characteristic differences, there is no scientific base, such as cognitive performance. In these cases, we wouldn’t even be able to find an average difference. Identifying where true differences lie is part of the challenge.Sometimes, we might find differences in certain population, that seem to be undeniably true, because they are based on data. One of the most obvious examples is crime rates among black residents in the United States. Looking at the numbers, we can clearly see a higher incarceration rate in this group compared to other groups. I would consider the color of skin in this argument a red herring. It’s an argument, which distracts from the underlying truth, which is more likely to be the lack of economic and social opportunity. We can acknowledge the reality, that a black person is more likely to be imprisoned throughout their life. But we must not assume that this is because of their skin color, but because of the system they live in.The progressive side of society often argues that differences don’t exist and therefore any behavior that acknowledges differences is wrong. The conservative side of society, on the other hand, points to some obvious differences and can’t understand how some people want to ignore them.The hard part is acknowledging that SOME differences exist ON AVERAGE, without drawing the wrong conclusions or discriminating against individuals. This makes the case for affirmative action, which acknowledges the (potentially discriminatory) impact of a system onto individuals opportunities.

Accepting this simplified reality, allows us to do acknowledge 2 important points.Averages do not allow us to make assumptions about individuals. (I acknowledge the non-binary nature of sex and gender, but for the following example, I will only take men and women into account.) We separate women’s from men’s sport, because society seems to have agreed on this categorization and there seem to be enough physical differences ON AVERAGE between these 2 groups. However, if we take 2 randomly chosen human beings, one male, one female, there is no way to say with certainty, whether one of them is stronger or faster (depending on the sport). So while we may acknowledge a tentative difference on average, we cannot make assumptions about individuals. Even if we acknowledge that there is slightly higher likelihood that one of the two random human beings, the man is slightly faster than the female, we mustn’t act upon it. We need to keep our minds open, because otherwise, we would be wrong too many times.It should be said, that for many categorization and stereotypical characteristic differences, there is no scientific base, such as cognitive performance. In these cases, we wouldn’t even be able to find an average difference. Identifying where true differences lie is part of the challenge.Sometimes, we might find differences in certain population, that seem to be undeniably true, because they are based on data. One of the most obvious examples is crime rates among black residents in the United States. Looking at the numbers, we can clearly see a higher incarceration rate in this group compared to other groups. I would consider the color of skin in this argument a red herring. It’s an argument, which distracts from the underlying truth, which is more likely to be the lack of economic and social opportunity. We can acknowledge the reality, that a black person is more likely to be imprisoned throughout their life. But we must not assume that this is because of their skin color, but because of the system they live in.The progressive side of society often argues that differences don’t exist and therefore any behavior that acknowledges differences is wrong. The conservative side of society, on the other hand, points to some obvious differences and can’t understand how some people want to ignore them.The hard part is acknowledging that SOME differences exist ON AVERAGE, without drawing the wrong conclusions or discriminating against individuals. This makes the case for affirmative action, which acknowledges the (potentially discriminatory) impact of a system onto individuals opportunities.

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Path Dependency and Problem Solving

In one of my first political science lectures at university, I learned about path dependency. If it has been done one way in the past, it is difficult to change. The status quo is always easier to maintain than to change. However, most people have learned that “We have always done it that way!” is not valid reasoning. Then why is it so difficult to change the status quo?Change has a prerequisite and a consequence. The usual prerequisite is that a majority agrees (e.g. a parliament adopts a law). The consequence is that there are usually winners and losers. The result is that there is usually a coalition of potential losers, who will fight to prevent change. No matter in which direction the change might go, there will always be losers campaigning against it. Thus, the status quo often remains, despite the fact that change is needed.That leaves us with an important insight. In a society or organization, where losers of change are taken care of (unemployment benefits or retraining on the job), change is much easier to implement, because the losers do not actually lose very much. In this sense, a solid and thorough social safety net does not hinder innovation, but might even strengthen it. Denmark is an example, in which a strong social safety net allows for quick reorganization of organizations and the economy.As we can see, implementing change isn’t easy, but there is another problem, which starts even earlier in the change process: How do we come up with new ideas?The human mind is used to working with what we have seen, experienced, or learned. Coming up with brand new ideas is therefore really difficult. How can you come up with something, that you have never seen or heard of?Additionally, humankind has gotten used to relying on what our ancestors and peers have done so that not every generation had to reinvent the wheel again and again. The Compatibility Gene by Daniel M. Davis is a beautiful description of the teams worldwide discovering the workings of our immune system. If each team had to start from scratch, they would have never reached the insightful results they eventually achieved.As we can see, taking for granted what we and others have done in the past is essential to humankind’s progress. But have we maybe forgotten how to think creatively and question the status quo then?Startups are known to do things differently and just “forget” everything that established players do and have done. Square, a mobile payment card reader is a great example of this:https://hbr.org/podcast/2020/03/squares-cofounder-on-discovering-and-defending-innovationsWhen all industry veterans from the credit card industry said that it wasn’t possible to build and sell a small and cheap credit card reader, they let the veterans go and just built it with a young and unbiased team.The challenge is therefore to recognize when true innovation is needed and when we should resort to incremental improvement. Being stuck in a daily routine makes it very difficult to recognize the need for a revolutionary change. This is where “outsiders” often come in and recognize the need for change.This creates another major problem though: If only the external observer recognizes the need for change, how do you implement change in an environment in which everyone needs to be on board before implementing change? This is where we come back to politics and the challenges with change on a political level. The collective of all insiders, the population, decides (directly or indirectly) which changes should be made. As the insiders often don’t see the objective need for change, we’re stuck with the status quo.Democratic processes are therefore partially flawed. They do not provide necessary incentives to facilitate necessary change. This is why they are often seen as inefficient and ineffective. It’s up to private players to be at the forefront of change.

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Technological progress and the meaning for (the end of) careers

In the past, technological change has been slow enough so that the largest part of the population could spend their career following one profession, more or less. From Benz’ first gasoline car in 1886 to Ford’s Model T in 1908, the first mass-produced car, there was enough time for all conservative horse carriage riders to retire, while the younger one’s quickly learned to drive cars instead. The impact would have been quite different if that change had happened in less than a decade, which is the speed of development we see today.The horse carriage example is a good one, because it is still relevant today. Cab, truck, and train drivers will be some of the first jobs completely replaced by technology. However, there will not be a 30 year transition period. (It took the smartphone less than 10 years to make photo cameras, calculators, and even credit cards obsolete.) Once self-driving vehicles are “ready”, it will probably take 2-3 years to replace all drivers of any vehicle.According to the Buereau of Labor Statistics, there were 305100 Taxi Drivers, Ride-Hailing Drivers and Chauffeurs in the US (United States Department of Labor, 2018). In China, there were 395800 cab drivers in Chinese cities in 2017 (statista, 2018). This doesn’t even count in all truck and train drivers and cab drivers in other countries. So within a couple of years, several million people will lose their job.One could argue that governments will work for these jobs to be sustained in one way or another, but economically, there is no reason why someone would choose to ride with a driver instead of a machine, which is safer and cheaper. While young drivers will hopefully be able to retrain and find other jobs, how many drivers, who are half way to retirement, will be able to retrain and easily find jobs in other industries, where unskilled labor is also being replaced?The drivers are just an example, which makes the problem clear. Many such industries will face the same problem. So while previous change allowed skills to be phased out over generations, future change will not allow enough time for that. It will be decisive for the decades to come, how society manages this change in pace.Inequality is rarely good for democracy and society. If inequality becomes too big, revolution becomes likely. Will technological change create an ever increasing class of people left behind? If that is the case, prepare your shelter and start storing clean water. Revolution is coming.While this is a complex issue and this article only looks at it in a simplistic way, there are two important consequences. First, the most important skill for people to stay in work will be to adapt. The US’ labor market is better suited for such changing environment with a more generalist labor force than, for example, Germany with a highly specialized labor force. Second, society needs to take care of the ones left behind. There will be an increasing group of people, which are past the point of adaptation. It is important to grow acceptance in society that these people have to be taken care of and everybody needs to pay their share to this in order to facilitate a working society.Increasing transfer payments from the economically successful to the people left behind is supported by the power of capital, which automation brings. Once machines do all the labor, few people with capital will own the whole economy. Their profits will rise exponentially, which was previously divided within society. With that money not reaching society anymore, other transfer mechanisms need to be put in place.

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Palestine & Israel – Before and after November 2023

I am writing thisas the grand-grandchild of a Jewish Holocaust survivor, who was sent to the concentration camp in Theresienstadt.
as a German citizen, whose only “pride” in his country stems from educating a generation whose responsibility is to make sure something like the Holocaust can never happen again.
acknowledging that I am by far not as educated as the experts dealing with the Israeli-Palestine relationship.
acknowledging that the Israeli government isn’t the Israeli people and Hamas isn’t the Palestinian people.
acknowledging that people become “irrational” when their security is endangered (Campbell, 2023).
emphasizing that justifying something (violence) is different from understanding/explaining it.
emphasizing that sometimes we have to simplify in order to discuss and communicate/discuss in good faith.I wonderwhy people are surprised about the Hamas attack on Israel considering that the Palestinians were constantly harassed, forced out of their land, and put in the “world’s largest open air prison” (NPR, 2023). Israel has continued this policy supported by Western governments without any peaceful way for Palestinians to resist.
what Israel and other supporters think will happen next and how they think a peaceful future in the region can be built.
why dying to fight for your land is seen as “fanatic” (The Economist, 2023) in Palestinians, but heroic in Ukrainians.Like many people, I am struggling to make sense of it all. What has surprised me after the horrific attacks, though, is the empathy shown towards the Palestinians and the suddenly appearing criticism of the Israeli government. It seems as if the Hamas’ attack has successfully shone the spotlight not only on it’s own cruelty, but also the Israeli’s government’s and armed force’s violence against Palestinians. The Israeli’s harassment of Palestinians seems to be acknowledged by the Western political class.I’d love to learn the things that I am missing here…

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Political correctness and bad faith in communication

Political correctness in any language is a debated topic. Politicians resign after using racial slurs. Popular children’s books are being rewritten to take out politically incorrect words. And on the other side, politicians and ordinary people complain about the negative consequences and ridiculousness of political correctness.It is important for me to state, that I am not promoting or opposing political correctness in any way. As always, I believe that the most realistic and pragmatic solutions lies somewhere in the middle. It is also important to consider the variety of languages and cultures across the world. Each comes with its own particularities and connotations.However, there is one aspect of political correctness, which has gotten “worse”, as polarization in media and politics has grown. Communication between polarized political and social groups has been made almost impossible by bad faith. I came across this Video (yes, it’s tiktok) and it describes the issue very well:https://www.tiktok.com/@txwatson/video/6853048946307222790Constructive Communication requires “good faith”. We need to be willing to understand an opponents argument and not purposely misinterpret the argument for our own argument’s sake. This would be “bad faith”. The statement ‘de-fund the police’ can be interpreted as:Reduce the funding for the police by some amount and redirect that money towards more productive services, such as mental health and social services (good faith).
Abolish police departments completely and have militias enforce security (bad faith).This deliberate misunderstanding in communication occurs not only on one side of the political spectrum.Political correctness shows a similar problem. When you use a politically incorrect word, the bad faith recipient is immediately offended by it, because they assume that all the bad connotations are implied. The good faith recipient will consider how it was meant not get offended, if the word was used out of carelessness, ignorance, or in a context, in which it is not politically incorrect, at all.My favorite example of this is the USC professor, who got in trouble for saying a Chinese phrase, which just happens to sound like an English racial slur. The phrase in question is a Chinese filler, which Chinese have used for as long as they can remember. In a Chinese context, there is no way this could have been offending anyone. So how can anyone be offended by this?By showing bad faith, the Chinese term was compared phonetically to the English slur. If you really look for trouble, it is easy to make that connection. However, there is absolutely no indication or reason to believe that the Chinese phrase was used with any negative connotation or intent. The good faith recipient would recognize the Chinese phrase and not even try to make the connection to the English slur. Why would they?While I believe that language has an impact on society and our lives and that it is important to update language as society progresses, this should lead us to reconsider our outrage over some of the things said in this world.A world, dominated by people listening in bad faith, is impossible. It makes communication and discussion, and thereby progress, impossible. Instead, we should constantly ask ourselves, what is it that they meant? This could save us a lot of trouble and energy we agitated over someone’s political incorrectness.

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Has inequality increased and does it matter?

According to The Economist, it is accepted widespread knowledge, that inequality has increased. However, when looking at the data and accounting for changes in demographics (such as marital status), economic inequality has actually remained constant over the past decades (Check out the Economist’s The Intelligence Podcast from Dec 03, 2019: With allies like these: NATO’s bickering leaders hold a summit). Why has rising inequality become general knowledge, while the data is not clear on it? Because the actual inequality doesn’t matter as much as the effects of it and the effects of inequality might have actually changed significantly over the past decades.Inequality is a highly emotional topic. It impacts many people directly in the form of wages, they can earn, which health care they can afford, and which education possibilities they might have. Therefore, politicians often use emotions to discuss economic policy, especially envy and jealousy. It’s a great pitch, claiming that an immigrant will take away your job. You cannot help but feel scared. However, this way of thinking does not only affect less educated or less experienced people.As Stephen Dubner explains on the Freakonomics podcast (Nov 28, 2019: How to Change your Mind), smarter people (in whatever way you want to define that) are even worse at looking at facts for opinion finding. The “smarter” a person is, the better they get at supporting their emotional opinion with facts and not vice versa. In short: No matter how smart and rational you think you are, there is a high probability that you have an emotional opinion, for which you selectively find facts. You are probably not the rational fact-based person, that you think you are. So whenever we talk about issues, such as inequality, we need to keep this in mind and we need to check ourselves repeatedly, whether our emotions have taken over our rational thinking.You cannot talk about equality without mentioning equality versus equity. In more practical terms, it comes down to formal equality versus informal equality. The former is usually explicit, while the latter is often implicit or structural. The US is full of these structural or implicit disadvantages. When you live in a poor neighborhood, your school tends to have less money and the bank is less likely to give you a loan. But wherever you live, you have access to the same school system and it’s the same algorithm calculating your credit score. So there is definitely equality in how you are being treated. This doesn’t mean that there is equity or you have equality of opportunity. So while both types of (in-)equality are intertwined, we need to be aware of the difference and how to address them.We also have to differentiate between the equality of opportunities and the economic and political consequences of (in-)equality. The lack of equal opportunities is a theoretical or very personal problem. You don’t get to attend your dream university or live in your dream house? That sucks, but that’s life. When the lack of education and house, however, starts to impact your job, your earning potential, your political power, and every other aspect of your life, it can become a real multidimensional problem. Every aspect of a person’s life is then impacted and when this happens to larger parts of a community, it becomes a serious problem to society. The lack of equal opportunities is often the reason for unequal economic and political consequences, which make equality visible.Equality is also relative. While economists try to put (in-)equality in quantitative terms, it is often not that simple. If your neighbor has a gigantic mansion, while you live in a shack, you are more likely to feel feel the inequality than if you lived in a shack surrounded by other shacks in a slum. That’s just life and there is no need to complain. A practical example of this is Sweden, which has a high number of millionaires, but little animosity towards them. They just don’t show it and behave modestly (The Economist’s Podcast: The Intelligence: Running into debt: Argentina’s new president, from Dec 10, 2019). Instead they eat at the same restaurants, that you might go to with a decently paying job. They might be sitting next to you, without you ever noticing.The past couple of decades have given the super rich several platforms to show off their wealth, especially social media. They even made a movie about this: Crazy Rich Asians. It is now so easy to pictures and videos of rich people partying with the most expensive champagne and traveling on private yachts and planes. The wealth of the wealthiest people is now continuously on display. Influencers spend days and weeks just to post an image that creates the impression that it is super easy to live a super luxury life and millions of people follow their accounts. The followers look at those pictures from their desks in average paying jobs, which suddenly seem low-wage, as few people will be able to afford the luxury vacation, that the freelancer just posted. It is not difficult to see, how the feeling of inequality, suddenly became very strong and might turn into political demands. This is where envy and jealousy come in and form people’s opinion, which facts cannot change.Yet, it is not universally agreed, that inequality is the problem. As three Yale scientists claim: ” it’s not inequality in life that really bothers us, but unfairness” (The Guardian, 2017). This brings us to the economic and political effects of this inequality.In a capitalist economy, it is not always most profitable, to maximize the number of customers. An example of this is inflight wifi. For several companies, it is a revenue generator and they aim to maximize their profit. ” As long as business flyers with corporate credit cards are out there, then Wi-Fi in the sky is going to be a luxury on the big airlines” (Fortune, 2015). By pricing a service in a way that only 10% of the population wants to or can afford it, the wifi provider maximizes their profit. When this model is applied to services, such as health insurance, which is getting more expensive, as medicine advances, leaves a significant chunk of the population without this service. One could argue that this is just economics, but health, as well as education, is important to one’s professional career and also one’s political power. It is a reinforcing cycle which results in so many children of wealthy politicians end up in a successful political career after their parents retire (or even earlier). On the other end of the spectrum, uninsured citizens don’t have the regular medical care they need, which makes health insurance at a later point in life even more expensive and unaffordable, because they will probably have accumulated quite a couple of preexisting conditions. The system is self-reinforcing by widening the gap between rich and poor, educated and uneducated, healthy and sick.This effect is not only unequal, but also unfair, if we believe in the spirit of the American constitution, which offers every citizen the same opportunities, the same rights, and the same political power. Why should someone have significantly more political power, just because they are children of a wealthy politician? Why should someone be able to get health insurance, covering life-saving treatments, just because they were born to rich parents? It is not a surprise that leftist ideas gather support, when people are faced with such an unfair system.With the rise of digital platforms, these issues are not only about economics, any longer. They impact the core of our society: democracy. It is now easier than ever to turn money into political power. A decent amount of social media marketing budget allows you to shape opinions and voting preferences. The developments in past and current US presidential elections are supporting this thesis: Russia was able to influence voters in the US, just by spending a marketing dollars with Facebook. Bloomberg enters the race, just because he has money and does not need to rely on donors, which are also an important part of the political process. It has never been easier and cheaper to reach and influence people all over the globe to your advantage. Doing this 25 years ago, would have been significantly more difficult, as it would have required vast on-the-ground operations in every region, which was to be targeted. The social media platforms even use their data to choose the audience most susceptible for your advertisements.Money has always meant political power. As a result, super-rich people need to be considered super-powerful. In a liberal world, without restrictions, the dangers become obvious. When governments and taxes for the rich are kept small, a lot of influence from the rich goes unmatched. Collective bargaining is one way to match the monetary power of the rich. But with enough money, you can even make unions disappear. If the wealth-inequality becomes too big, the whole democratic system is endangered.The topic of inequality is endless and complex. The 2 takeaways should be, however, that inequality only matters when it is visible and when it has unfair consequences, such as undermining our democracy. Inequality in itself does not have to be bad. But even if inequality hasn’t changed over the past decades, it doesn’t mean that it shouldn’t be addressed. Maybe, the 21st century needs less inequality than the centuries before. Maybe the economy and politics of the 21st century don’t work well with the inequality of the 20th century.Alternatively, it might be necessary to address the effects of this equality in the 21st century. Political processes and structures need to be strengthened. Regulation needs to be put in place to allow every human being to be treated medically, even if it ‘doesn’t make sense economically’. In the right environment, economies can benefit from inequality as an incentive for entrepreneurs and employees.As always, a one dimensional look on this issue is a great populist strategy for politicians, but not a path to a better world.

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Who benefits from welfare payments?

The following is a letter to Luigi Zingales and Bethany McLean after listening to Season 2 Episode 76 of their podcast CAPITALISN’T.Dear Bethany, dear Luigi,Today, I listened to season 2 episode 76 on Poverty And Inequality In America: Part 1, with Sen. Phil Gramm. I appreciated the range of critical perspectives on how income and wealth (in-)equality is measured and reported. One particular aspect made me very curious and I would love to understand what economists and the academic literature has to say about this issue. As you were speaking about the US, I will only take the US into account, however, this argument might be valid in other countries as well.Towards the end of the episode, you come across a recurring topic in Capitalisn’t, the welfare spent on low wage workers. The prime example for this is Walmart. This is often represented as big corporations using the welfare system to have their operations subsidized by tax payers.I want to make three assumptions in order to make this argument:Walmart’s net profit margin isn’t extraordinarily large. Therefore, the argument that Walmart’s shareholders are pocketing taxpayers money seems rather weak. So for the sake of the argument, profit margins shall be held constant and not have a significant effect (macrotrends.net).
High-income taxpayers pay a larger proportion of taxes than low-income taxpayers. With current welfare programs, this leads to a redistribution of income from high-income taxpayers to low-income taxpayers (taxfoundation.org).
As discussed in the episode, I do acknowledge that income is about more than just having enough money to buy food and a low income can have many negative social, professional, and psychological consequences.The most popular argument goes: The middle class and high-income taxpayers pay the highest amount of taxes, which is transferred (in parts) to low-income workers, who benefit from food-stamps or medicaid. Indirectly, companies can benefit by underpaying their employees.But what if that is not the full picture? We know, that employees are a major cost factor for today’s companies, especially in developed countries. Considering Walmart’s only average returns, we have to assume that they would have to raise prices in order to make up for higher wages – if welfare programs didn’t support their employees anymore. Higher prices at Walmart would disproportionately impact low-income and other households, who buy their essentials at Walmart.These other households are an important group and could be considered lower and upper middle-class. Despite the fact that they do not work at Walmart or might not be shareholders at Walmart, they still benefit from lower prices. The low-income households might even benefit twice. They get a job, get the welfare on top of their salaries, and experience lower prices in this retail segment.What this does in effect is to take taxes from high-income taxpayers and redistributes that onto quite a broad part of the population, benefiting the lowest-income taxpayers multiple times while still benefiting even the middle class.So while there are clearly problems with how this distribution is done in practice, creating a low-income and welfare dependent group, the empirical effects of this tax and welfare setup is by far not as bad as it sounds and looks on the surface. While clearly being a policy that supports consumerism, despite all its flaws, it has the potential to raise the living standards of large parts of our society, especially the ones that could benefit from it the most.I would be curious to hear whether you would agree.From London,David

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The challenges of Crypto-Currency as Currency

Crypto currencies have been hailed as the future of money, thanks to it’s decentralized, fast, and global nature (For example, see Saifedean Ammous’ The Bitcoin Standard: The Decentralized Alternative to Central Banking). There are several advantages, which are mainly shortcomings of the current financial system: the global nature of crypto currencies, the independence from political actors, and the efficiency, for example to settle large sums. This is where crypto-currencies promises’ get their first dent: There is no reason why centralized systems shouldn’t be able to catch up and offer similar functionality. Electronic cash, which has been issues by countries such as China, shows that when governments pull together the will to implement improvements, they can be implemented even with the existing system. Europe’s Single Euro Payments Area (SEPA) was a much earlier example of this. However, when it comes to discussing the future of crypto-currencies, many seem to forget why and how currencies were created by governments in the first place.Governments and central banks play a huge role in steering the economy. While this sometimes does more harm than good (see Turkey throughout 2021), it is still a critical function for many governments around the world. Do we really want to give up that power of governments to influence the economy? Governments are surely no perfect steward of the economy and make mistakes, but it’s still the next best thing. When things are looking down, wouldn’t we want the government to inject some cash (the way it happened during the COVID pandemic)? Wouldn’t we want governments to reduce cash supply, when inflation rises?But there are much more practical implications. While most citizens will hopefully never have to rely on a government’s deposit security scheme (usually governments guarantee up to 100.000 USD/EUR/GBP to every citizen in case their bank goes bust), this won’t really be possible if the government isn’t in control anymore. Of course, you might say that with crypto we don’t need banks that then cannot go bust, but we have seen enough incidences in which crypto currencies were stolen or crypto exchanges were compromised and billions of dollars in value was lost. Giving governments more control over the financial system actually has huge advantages for consumers across the world.This is not to say that crypto doesn’t have any value or should not be used. From NFTs to cross-border transfers, crypto will probably make a lot of processes better, faster, and cheaper. But if we really wanted to replace governments’ currencies, we would be willing to give up quite a significant amount of safety and security. I am not sure this is what we as a society would want.P.S. There is an additional debate to be held on how decentralized crypto really is and who controls it and how decisions are made. But that is a discussion for another time.

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Empathy and Shared Context

Political polarization is not only a problem of the US’ two-party system. Populism and the rise of right wing parties all over the world is contributing immensely to divided societies. There are divides on local, national, and international levels. Black Lives Matter versus Blue Lives Matter, right-wing versus mainstream politicians, China versus US.Communication between opposite sides seems more and more difficult. This is very visible on social media, where objective discussions quickly turn into personal fights and streams of insults. It would be easy to blame this on anonymity in social media and move on. But discussion lies at the very heart of our democracy and therefore it is critical that we enable inclusive communication to save our society.The first big challenge for productive discussions is that a small minority can derail the whole conversation. One person shouting personal insults at any participating person can spiral into a shouting match, leaving the whole discussion invalidated. Therefore, it is vital that all participants agree and act according to a set of rules. When someone breaks these rules, it is up to all other participants to enforce the rules.But that’s not the only common ground that needs to be found. People’s experience and data set is often very subjective. A person living in a polluted city sees empirical consequences of environmental pollution every day while someone in the countryside might base their opinion on green pastures and blue skies.The way communication works is also very personal. While for some, science is the objective pursuit of reproducible knowledge, while for others, it’s something to believe in instead of the bible. When these two opposites discuss scientific findings, how could they ever agree on the meaning of it?Sometimes, language is ambiguous and each discussion participant will interpret the other’s words for his own use. When a mainstream politician in the US talks about de-funding the police, do they actually mean to withdraw all money and get rid of the police? That is what the other party will claim they have said. The meaning of such statement is mostly just that some funds should be redirected to more effective services.The list of political discussions containing ambiguous and (purposely) misinterpreted statements is endless. Scholars of communication have plenty of models and concepts that explain the difficulties in communicating with each other.If people were better at understanding the opposite’s perspective, many misunderstandings could go away. Hearing someone say that environmental pollution is harmful changes completely, when one considers that that person might struggle with excessive smog levels every day. Discussing scientific results changes when one considers that science is just another worldview, often conflicting religious worldviews. Talking about de-funding the police becomes much more reasonable if the goal is to redirect funds to more effective services.In order to get there, we have to get much better at opening up ourselves to other perspectives and asking ourselves, what the other person’s experience or data set is. What have they experienced that makes them have this opinion? What motivates their opinion? What do they know that I do not know?This is something that can be learned. Many students going on exchange for a certain period of time, learn to understand different cultures and perspectives and also learn to see their own assumptions more critically. One of the most peace-bringing measures to reduce national and international conflicts might be to send every teenager to a foreign country for at least 6 months.The sad truth is that there are always people benefiting from conflict. Politicians often benefit from creating a conflict with another group of people. It is up to us to be better than that. If we manage to create productive and inclusive discussions, we can even put an end to politicians trying to exploit conflict.I do ask myself regularly: If I had grown up in a terrorist camp, would I have become a terrorist? That shows that opinion and persuasion depends so much on the environment and insulting someone as stupid doesn’t help. Instead we need to ask: Why do they think in this particular way? What have they experienced in their life that makes them think in a certain way? What do they mean when they make a statement? Only then, we can start a productive discussion and strengthen democracy.EDIT: This tiktok video pretty much sums it up:https://www.tiktok.com/@txwatson/video/6853048946307222790

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The future of mobility

Regularly, I get asked how Uber, car sharing providers, and other mobility providers plan on making profit. How can you be cheaper than cabs, but have a similar business model? How can you make money with car sharing, when a ride only costs around 10 dollars? How is it possible to make money on scooters, that only cost one dollar per ride? But still, Uber, Mercedes, and venture capital companies keep spending millions, if not billions, on these ventures. Why? What is going to change? – Everything!The status quo of mobility is at the same time very chaotic and very neatly structured. It is chaotic, because all sorts of providers play a role. Public transport offers buses, subways, trams, taxi companies offer cars with drivers roaming the streets, car hailing companies offer cars with drivers on demand, bike/scooter/car sharing companies offer vehicles without drivers, and so on. Choosing how to move from A to B requires a scientific analysis of all the options, speed, and price. Not many people will do that on a daily basis and therefore habit will make the decision. Choose what you do every day so you don’t have to think about it anew every day.However, it is also very structured, divided in separate silos. For public transport, you purchase one (or sometimes even two) ticket(s). You pay for the cab fare with the cab driver. And the car-sharing fee is taken separately from the car sharing company. And even when searching for the fastest route, there is an app from the cab company, an app for public transport schedules, and only Google (not a mobility provider themselves, yet?) have started combining and comparing different options. But even Google doesn’t show you that the optimal mode of transport might be public transport for the first half and a shared bike for the second half of your journey.This is all but efficient, but two major technological developments will change all that. The first is already underway. An example of this is whim. It is a single platform/app, which combines all available modes of transport: public transport, taxi, car, bike, and everything else. Where do you want to go? This app will not only show you which vehicle is the fastest, but it will also combine these vehicles and their prices. With whim, you can really find the most efficient way to get somewhere, with only one click of a button.Driverless vehicles will be the second big change. The cost per extra vehicle running is reduced significantly without a person behind the wheel. Cabs become cheaper and public transport companies can use more, but smaller, vehicles. Side note: With autonomous driving, cabs and car sharing will become one.If we finish this train of thought, we end up with small vehicles, that run on demand and pool together passengers with similar routes. This doesn’t stop on the road. Even trains can become smaller but run more frequently. Schedules will become unnecessary, because vehicles always take the perfect path for all passengers. No need to wait for a bus at a certain time. Just demand a route through the app, and the algorithm will guide the optimal vehicle to pick you up where and when you need it. This might sound utopian, but driverless vehicles will make it possible.In other words: Currently, mobility is divided in vertical silos. Each mode of transport for itself. In the future, it will be divided in horizontal layers. Apps, that combine all modes of transport on top and mobility suppliers, which integrate with the guest facing app and provide the vehicles.It is understandable, that so many current mobility providers venture out into new modes of transport to avoid being degraded to a supplier to the powerful top level user-facing apps. When the development is complete, you want to make sure that you control the user-facing app. This is why BMW and Mercedes join forces to create a mobility platform, this is why Uber is developing self-driving cars, and this is why everyone is willing to take losses for a couple of years. When the time comes, you won’t succeed in your vertical silo. You need to be the horizontal winner.And that is not even all of it. This is only a fraction of the bigger logistics battle. If you have vehicles driving around as requested, you can not only transport people, but also goods. Uber was one of the earliest to recognize that and established Uber eats. Transporting Pizza or a person, it’s the same. Airlines have done this for decades. Parcels are not only being shipped in cargo planes, but also on passenger plane.When talking about mobility, we always need to keep the big picture in mind. Companies are playing the long game. Pay offs will be immense. But it’s a winner-takes-it-all product. Scalability is everything. So you can’t wait it out. You need to be part of creating that change, or be left behind.

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Perfect Competition and Lack of Economic Alternatives

Classical Economics relies on Monopoly models, Oligopoly models, and Perfect Competition. Their predictive power and accuracy are up for discussion, but they do help (especially economics students) to illustrate and explain macroeconomic behavior. During a recent stay in Zambia, I observed the consequences of lacking alternatives for economic actors.A basic assumption to the model of Perfect Competition is that a firm will exit the market in the long-run, if losses occur. Instead of taking these losses, the firm will use its resources for more profitable activities. This seems obvious as a company will be unable to pay its bills and eventually will have to claim bankruptcy. But what if economic alternatives are not available? Industries are crowded out from within, spreading potential profits to a large amount of people, leaving only very little profit for entrepreneurs or even producing losses for the whole industry. Consequently, it prevents capital accumulation, entrepreneurial incentive, and potentially economic, social, and political growth. Providing employment in order to “uncrowd” these industries might help to create growth by creating entrepreneurial incentives and allowing capital accumulation. I encountered two striking examples of such crowded industries during a stay in Zambia, which I will describe below.One example of a crowded “industry” was public transport in Lusaka, mainly consisting of small buses, which go on a certain route but leave the station whenever the bus is full. At every bus station, there were therefore a couple of people, which pull people looking for transport into a specific bus in turn for a small amount of money, which the bus driver hands to these people, whenever the bus is full and before the bus leaves the station. It was striking that the people pulling people into certain buses did not make a difference. The bus arriving first, was mostly the bus leaving first, as customers always chose the first bus in line because it was usually the first bus to leave. Also, people getting on the buses did not have a choice between different kinds of transport. The next probable alternative would have been a taxi, which would have cost them ten times the amount of a taxi. Thus, the advertisers did not add any economic value, whatsoever. But because of lacking employment opportunities, people crowd around the few economic activities that exist, reducing the revenue of the public transport actors significantly. According to the 2013 Afrobarometer Survey, unemployment “topped the list of the most important problems facing Zambia that the government should address” (The World Bank, 2013, Zambia Economic Brief, page 13).The second example is more straight forward: the subcontracting industry in the construction sector. With little economic alternatives, there are plenty of Zambian contractors, who supply labor to foreign companies. Because the firms are dependent upon the foreign projects, they will undercut competitors even if it means to incur losses. The alternative would be to not have any work at all, so the best option is to get work, and create a cash flow, which will bury the financial deficits, in hope for a more profitable future. It goes without saying that this method is not sustainable. But again, because the owner of the contracting firms do not see any economic alternatives, they are stuck in an unprofitable industry. This is the case where an overcrowded industry leads to losses even in the long run, because exit from the industry is cost-less in accounting terms, but would mean the loss of all economic activity, which is a high cost after all.The lack of economic alternatives, therefore, changes perfect competition in the long-run, creating industry wide losses or reducing profits significantly, which again, has impact on economic growth. Offering employment in order to uncrowd certain industries might help a country, such as Zambia, to grow national entrepreneurs, allow capital accumulation, and grow the economy in the long-run.But as always, this is just a very limited idea in a much bigger problem.Most of the information here stems from research for a bachelor project. If you would like to know more about the data or my findings, feel free to contact me via the comment section.

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Security versus Privacy

“Those who surrender freedom for security will not have, nor do they deserve, either one.”– Benjamin FranklinEdward Snowden has created quite some stories in the news. The discussion on these topics is good and important, but I am missing two major points:The United States hypocrosy has long been obvious when it came to human rights, torture, and freedom. Especially when facing its Asian counterpart China, the US has always applied two standards. While a lot of people seem to have gotten used to this double standard, a very big hypocrisy became public when Edward Snowden leaked information about the NSA and its data collection methods. Even more so, when officials in and outside the US defended those programs. Obama himself stated that, “you can’t have 100 per cent security and also then have 100 per cent privacy and zero inconvenience”. Like other leaders, he acknowledges that a certain degree of intrusion into private lives is necessary for the society’s safety.Is that not, what China has been preaching for years now? That in order to secure prosperity and peace, some individual rights might be limited? I want to make clear, that I do not claim for intrusive government to be the better choice. This is just something that we should keep in mind, next time when we talk about Human Rights and authoritarian countries such as China. The news agencies seem to me more interested in hunting Edward Snowden, than seeing this hypocrisy. Acknowledging the similarities of the USA and authoritarian countries might after all help to improve their relations and with more trade and influence, might help to solve conflicts.The second point, I have been asking myself: Have we already surrendered to terrorists? This should not be taken the wrong way; I do see the need for security measures. But is giving up our privacy not letting the terrorists win? Is putting our lives completely in the hand of our government not a step away from democracy and discourse? In our safe and comfortable life, are we getting lulled into the government’s hands, where we stop asking questions and wondering why? These are questions from an extreme perspective, but regarding the massive spying on society, it is worth thinking about them. But giving up my life to the government, because terrorists scare me, is the terrorist’s goal. And I do not plan on letting the terrorists win.

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Intelligence Agencies and Control

Since Edward Snowden, we know how much intelligence agencies, especially the US’ and its allied intelligence agencies, collect about ordinary citizens. Nothing is private and everyone can become the target. Is that something we should be worried about? Should we be worried about the absolute power enjoyed by intelligence agencies? If so, why isn’t anyone doing anything about it?We are living in volatile times with terrorism, human trafficking, child abuse, and other cruelties always present. While intelligence agencies cannot prevent tribal massacres, such as happened in Nigeria in January of 2015, they can prevent terror attacks in developed nations and fight human trafficking as well as child abuse. One clearly needs to weigh the benefits of empowering intelligence agencies (giving the government unchecked power) against the impact this has on democracy and the political maturity of society.All of this is based on the assumption that an all too powerful government is not beneficial to society, because it will abuse its power or individual actors will abuse their position. Even when intentions are good despite the seducing sides of power, not being challenged regularly will lead leaders to follow bad ideas just as much as to follow good ideas, just because of bounded rationality and the fact that one person or ideologically connected group of people will probably not be all-knowing.So how do we weigh the power of intelligence agencies against the power of society? First let’s briefly analyze the problem with what Edward Snowden revealed: Yes, the US government and its allies do collect and use a previously unimaginable amount of data. We should be afraid that this data might be used against us at some point. But because, anyways, the data exists on the internet somewhere, it is questionable if it really makes a difference whether the government sifts through it right away or at a later point of time. Considering the time pressure on uncovering and preventing terrorism-plots, analyzing the data in real time might even be the better option.Do we just need to accept the government’s absolute power over society via intelligence agencies then? This is where we have to think outside of the dichotomy of government control versus personal freedom. A big part of the scandal of Snowden’s revelations was the fact that secret courts and politicians with very limited insight and permission to speak supervised the surveillance system. The system took on a life of its own, out of the hands of democratic control. This is where real danger appears.In most democratic states, society trusts their politicians to make decisions on their behalf and in the interest of society. This is possible, because politicians will be evaluated based on results and they will have to face reelection after a certain period of time. This is not possible in this case. One could argue that sometimes secrecy is necessary in order to protect politicians who want to make a decisions based on their true believes and not on public pressure or financial incentives, but this topic, which involves every person’s privacy and personal freedom, is too sensitive to leave it to a few elected politicians without any accountability. Others might say that secrecy is necessary to limit the knowledge of terrorists, which will then go around the media monitored by intelligence agencies, but now that the extent of the agencies’ surveillance is public, it is time to make proceedings regarding the surveillance public.Therefore, the solution to balancing the intelligence agencies’ power and personal freedom is not either or, it is a third way. The intelligence provided by intelligence agencies is valuable. The personal freedom and political maturity of society is just as valuable. Combining both, there can be efficient and effective intelligence agencies supervised by politicians, which are accountable to society. Ensuring the accountability by means of transparency and other citizen engaging processes is the cornerstone of such a solution. Instead of complaining about the power of intelligence agencies, citizens should demand the effective democratic control of those.

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Perceptions and Discourse

The Sino-African investment discourse in the broader topic of African development has two major narratives: Firstly, China as the savior of Africa’s development after decades of failed Western development aid, and secondly, China as the devil, who exploits poor weak African states. For a bachelor thesis, I went to explore the perceptions involved in this issue in the Zambian construction sector.After plenty of research and an extensive literature review, the dominant position in (Western) academia seems to perceive China as the devil, who exploits African states. Chinese involvement in Africa does not live up to Western standards in terms of labor standards, safety standards and environmental standards. This is a general problem with foreign partners, but Chinese firms stand out as the scape-goat. While doing research locally in Zambia, I did not find these problems even after searching hard for these problems.I went to Zambia assuming huge issues in terms of safety, sustainability, labor rights, and environmental issues, because that is what I have learned from academia and media. But wherever I went, people spoke highly of their Chinese partners. Chinese firms bring capacity in terms of skills, knowledge, and capital, and they get along quite well with the local population. This was different some years back, when Zambian workers ended up killing Chinese foremen in a conflict, but the situation has calmed down and Zambians appreciate the Chinese again. In specific cases, there were people in the streets, hoping to find work with Chinese firms, there were workers on construction sights, who described the Chinese foreman to be like a father to them, and there were sub-contractors, who claim that without the Chinese, there would not be any work at all.How can it be that the perceptions drift so far apart and what does it mean for the discourse of Chinese involvement in Africa? Firstly, we should be careful, who the so-called problem owner is. Is it the Zambian people, who struggle to find jobs, or is it the Western ideologists, who want a perfect world with equality and prosperity for everyone? Secondly, and this should not be surprising, how do we talk about an issue, that is so very distant to us (Western Academics)? Thirdly, should we be more open to other paths of development, meaning that we might need to compromise on some issues?While being in Zambia, I discovered that there are other issues more important than how the Chinese do business in Africa. Zambia first needs to improve their education system, provide capital to entrepreneurs, and work on stable institutions, to name three major issues. Making China the scape-goat might be easy, but it is too easy and does help neither the discourse, nor African countries.The limitations of the data at hand is that it is only a small sample population collected over a short period of time in a very limited geographical space. Also, the construction sector is special in its contract based nature, which helps to enforce standards and regulation, because of a third party, which audits construction sights and because breaching a contract comes with high costs. But still, the difference in perceptions of (Western) academics and the local population should make us think.If you would like to read the full paper or want to get a list of my sources, feel free to contact me via the comment section and I will get back to you.

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Germany’s and Italy’s labor market reform leading up to the Global Economic Crisis of 2008

While southern Europe is still struggling with the European debt crisis, Germany’s economy has, despite minor dents, not come to a halt and so far has withstood any recessive tendency. Especially in Germany, people seem to see a connection between Gerhard Schröder’s Agenda 2010, which was a labor-market reform, which began in 2003. The implementation occurred mainly until 2005 and focused on a liberalization of the labor market. A Japanese researcher even claimed to have found the exact impact, which these reforms have on Germany’s current economic success (Spiegel Online, 2013).So far so good. But like many economic puzzles, objective answers will, if ever, not be found soon. But there are indications that help us find informed evaluations. One of those very interesting indications is to compare Germany with Italy. Both countries are one of Europe’s major economies, decentralized, technology exporting, just to name a few similarities. More importantly, Italy also liberalized its labor market massively.For Germany as well as Italy, these labor-market reforms improved unemployment. So what happened, that Italy is back with unemployment and a miserable economy? This is far from an exhaustive analysis, but there seem to be long-term effects, which have not yet reached Germany.The effects of these reforms are a dual labor-market, with low-paid unskilled workers and privileged high-paid skilled workers. This works well, as long as the economy is booming and wages keep rising. When Italy hit the crisis in 2008, jobs were lost and without a major social safety net, people lost their income. How does a country get back on its feet? Similar to developing countries implementing Import-Substitution-Industrialization, a functioning internal market is imperative for international competition. But Italians stuck in low-paid and temporary jobs fail to create a functioning market. In Scandinavia, where unemployed are caught by a solid safety net (flexicurity), people keep their purchasing power and therefore, the economy does not dry out, as soon as the external inflow decreases.Despite all the praise for a liberal labor market in Germany, we should see what the long-term effects are and more importantly not implement liberal labor-market policies, without an environment, supporting it.

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Are Current Issues Too Complex for Democracy?

First, it needs to be said that I am a strong supporter of Winston Churchill’s statement: “Democracy is the worst form of government, except for all those other forms that have been tried from time to time”. I fully believe in the value of democracy and I would not want to have it any other way. But, recent events in democratic countries have allowed for doubt that the intelligence of the masses will guide humanity safely and peacefully through time: the rise of right wing parties in Europe and a general disenchantment with politics.Firstly, have issues really become more complex? Probably not. But, people can access unfiltered information from all perspectives. The amount of accessible information is too complex. This leads to bound rationality, where people are not able to process all the information they can access and therefore make suboptimal decisions. That is, if people actually take time and try to process all the information. It is so much easier to let it be and let other people vote and decide. Why would I have to deal with tons of information every day, chose which information is relevant, balance different perspectives, and all that after working hard every day? It is so much easier to just not be politically active at all.The recent midterm election in 2014 in the US might be a very good example of it. Especially, since education is a very solid predictor whether a voter is likely to vote or not (Washington Post, 2014).Secondly, voters need to ask themselves whether they can still make informed decisions about relevant issues. Even business school graduates struggle to completely understand the financial crisis of 2007. How is a voter supposed to chose between several methods of solving the issue offered by different parties? The easiest is to go with the option which is the easiest to understand. It does not matter whether this option is realistic, but at least the voter can justify why he or she stands for that option. Another example is a rural American citizen, who sees his bright sky and clean air and therefore is against any kind of environmental regulation. There is no reason for him to change his mind. If he went to some major Asian cities and actually saw the impact of air pollution as it happens there, he or she would not have any doubt about reducing his or her ecological footprint. A third example would be the IS situation in Iraq and Syria, where on one side the US is against Assad in Syria but fights with him against the IS (which is only one paradox in this diplomatic chaos).As the New York Times reports, there is a movement on the rise in Eastern Germany: PEGIDA (New York Times, 2014). Despite there only living less than 2% foreigners in that region and a minor proportion of those foreigners being Muslim, protesters are afraid of “Islamization”. But these rational arguments do not apply here. Fear and populism is a much better tool for politics than rational discussion.The issues mentioned in this article should not encourage us to be less democratic. They just show the importance of education in democracy. Political and economic education needs to be part of every student’s curriculum if we want democracy to be as successful as it has been overcoming discrimination and racism. On the other hand, politicians need to deal with fears and hopes of their constituents not by satisfying populist needs, but by educating and creating trust. But the abuse of power is a whole different topic and can be balanced by a strong and educated constituency.

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Has the EU’s Carbon Trading Scheme Failed?

“ETS, RIP – The failure to reform Europe’s carbon market will reverberate round the world” – The Economist, 2013The European Union’s cap-and-trade scheme aiming to reduce greenhouse gas emissions has been proclaimed dead not only by The Economist. Is it really that bad? We take the United Nation’s point of view that human made greenhouse gases accelerate Global Warming. The success in the first international emission trading scheme, and until today also the world’s largest, is therefore a major milestone in fighting greenhouse gas emission. If it failed, this would be a major setback for emission reduction. So has it really failed as The Economist states?Undoubtedly, there seems to be an issue. Emission prices fell from over 30 Euro per ton of CO2 equivalent to under 5 Euro. Has oversupply destroyed the emission market and the emission trading scheme?Economic potential is not the same as political goals. The first two phases of the EU Emission Trading Scheme (EU ETS) were merely a familiarizing with the concept of emission trading and how to deal with administrative challenges. Since emission allowances were allocated for free based on historical performance, no major emission reduction was planned. In phase three of the EU ETS, with auction of emission allowances and the EU Parliament’s decision to withhold emission allowances from the market, there will be more reduction of emissions. On the contrary, the first two phases have succeeded in making managers incorporate greenhouse gas emissions in their business decisions (EU, 2010; Schiller, 2011). Although allocation of emission allowances could have been more ambitious (also due to the economic crisis), it did reach its political goals. It also reached its goals in absolute terms. Although the emission reductions also had other reasons than the EU’s cap-and-trade scheme, the reduction still occurred. To state that the EU ETS has failed, is therefore highly debatable.More flexibility would have been good to achieve its full economic potential, though. The EU ETS’ success is still to be seen, but countries like China and the USA should not be afraid to implement their own emission trading scheme. They should learn from the EU’s starting problems and implement ambitious emission trading schemes.