Externalization and its Benefits

In the 1950’s after WWII had subsided there was a new boom of global trade. This new form of business would forever be known as globalization. With a new boom of globalization firms were beginning to realize that specialization was key, and the era of owning every step of production seemed to have had subsided. Companies figured out that owning all steps of production was not a necessity to be successful. A modern example of this would be apple not owning the metal companies that send them pieces in for computers. In modern society companies have began to externalize certain steps of production effectively cutting down their opportunity costs when producing a good.

As a person walks down the street they approach the Apple store where the newest I-phone has just gone on sale. Before the consumer was able to purchase the phone multiple steps were taken to create the phone. While many people believe Apple is a “farm to Table” company, they externalize the majority of their production. For Apple they only control two steps of production: Design and Distribution. The majority of outsourcing for Apple goes to Foxconn, the Asian mega producer for US electronics. For Apple if they did not do this costs would be substantially higher, they would also have be focused on worker safety and a wide range of issues that come along with production of goods.

After purchasing their I-phone our everyday consumer continues their travel to Wal-mart where they begin to purchase everyday items. During their grocery shopping the average consumer may not realize that almost all of the clothing and other goods in Wal-mart are made in China. For Walm-art to purchase goods that are made in the US it would not be beneficial to them as a company. For both companies producing their own goods and especially producing them in the US would not be beneficial. Externalizing for these companies creates new opportunities.

With globalization being the new norm governments have had to change their policy accordingly. Organizations such as NAFTA create a system that is conducive for outsourcing in these areas, due to trading being free for countries in North America. Attempting to break down trade barriers is a direct way to let companies outsource steps of production. While not every outsourcing opportunity is available for a company, favorable tariffs and other forms of import policy can create a productive setting for outsourcing.

As our country and the rest of the world become more and more connected the idea of globalization becomes one that more and more people are willing to accept. Not only do people want cheaper goods, but they also want quality goods that not every company can produce by itself. This wave of international trade and outsourcing will drive the economy into the future as shipping becomes easier and easier for companies to do. In the next twenty years specialization and other forms of advanced production will begin to arise in countries where this was not a possibility. Due to the economic profit opportunities, companies will continue to outsource and not control all steps of production.

Federic Bastiat and Liberty

Bastiat Propaganda

Federic Bastiat once wrote that “At whatever point on the scientific horizon I begin my researches, I invariably reach this one conclusion: The solution to the problems of human relationships is to be found in liberty.” While in theory this is what people all over the world want, it is not necessarily true. In the most current dictionary the definition of liberty is as follows: the state of being free within society from oppressive restrictions imposed by authority on one’s way of life, behavior, or political views.  If everything were actually solved by absolute freedom we would be living in anarchy. I am not a socialist or a communist, my views are that free trade and especially Americans rights to freedom are the way to go. However, I cannot say that the answer to all the problems in the US can be solved with liberty.

Now let me take this time to begin by saying that when people are actually being oppressed then the answer to the problem is actually liberty. But, the issue with this is that some people believe they are being oppressed when they are actually just breaking laws. Hypothetically speaking, if a murderer was to say, “I am being treated unfairly by the justice system, Federic Bastiat said that liberty is the answer to justice, I deserve to be free.” In this situation the murderer truly believes he or she is being oppressed, and that the only option is for liberty. So in this situation for Mr. Bastiat to say that liberty is the answer would not truly be correct.

I agree with the idea that liberty is the answer to a lot of problems that our society currently faces, but when Federic asserts that it is “always” the answer, he immediately loses me.  A non-hypothetical situation that liberty would not have solved was the financial crisis that peaked in 2007-2008, or in simpler terms the housing bubble. For those of you reading this that are not sure what lead to the housing bubble, I will give a quick summary. With the deregulation of the Savings and Loans market, the investment banking industry was able to give horrible loans out to millions of people, and after loaning to a point where there were almost no loans to be made on the market, the bubble burst devaluing property and causing a nation wide default of loans. The nationwide default caused nearly all investment banks that had these loans to go bankrupt.  In this situation that is still fresh in the mind of many Americans it was too much liberty that caused people to become victims to bad loans. While I am a proponent of free trade, I believe this crisis could have been stopped with companies being told they have to be reviewed periodically to make sure they are in good standing. Sadly, with their unfound freedom these banks took advantage of their liberty.

Mr. Bastiat is radical in saying that everything can be solved with liberty, but at the same time, it is liberty itself that keeps our country what it is. Without free trade and free speech we would be an oppressed nation crumbling under an oppressive government. For our country to thrive we must pride ourselves on liberty, but remember that to much liberty and no law leads to a place that is not fit for living.

Matthew’s Thoughts on Copyrights and Patents

 

For young entrepreneurs today there is a mounting issue that does not seem to be going away any time soon. While the general public may not be aware trolls are controlling our current patent system, and no I do not mean the type that you see under a bridge. These patent trolls are companies and wealthy individuals that file vague patents so that they can sue inventors who may accidently create something that a troll has a patent on. For this exact reason our patent and copyright system is currently in danger and while it may seem like we have a great system, the companies with more money and power are stopping inventors from having creative freedom, due to the fear of companies taking all profits. This idea is lengthened upon in The Economist article “Trolls on the Hill”. The reason I began to open with the facts of patent trolls is because I believe this is vital information in the understanding of patent and copyright analysis. Not only do we see issues in inventions, but also in the media industry there has been a shift away of how to handle fraud and stealing of property.

Currently if I was to log online I would have the ability to illegally download books, movies, and TV shows, all three goods that usually cost a lot to purchase.  With the surfacing of Internet piracy, firms have moved away from outright purchases of shows to subscription services that stream the shows to any device. For these reasons media conglomerates don’t see a need to care about piracy, due to advanced advertising techniques they make all the money they need through streaming, substantially driving down costs for songs, movies, and TV shows. But one major form of mass-market entertainment, books are keeping their prices at a high cost. Due to the fact streaming books is not widely done, books are not held in the same pricing scheme as other media. While books are cheaper to produce there is not true way to reap the same profits from books and movies. The difference in means of profits creates a divide between the two.

Now when it comes to valuating a patent or a piece of media what truly decides it is how well the item will end up selling for. While it may be the easy way out to say the market decides a price, they truly do decide the price. By either buying or not buying a product at a certain price the market lets the companies know whether or not it was an acceptable price. To say an idea has value also hold meaning considering if a concept is great then people will pay a lot for the idea, and they will pay for a great concept even if it doesn’t work out. When dealing with patents and copyrights it’s a difficult situation due to the fact that people’s ideas and livelihoods are truly at stake when they put them into copyrights or patents. In the next few years due to technological advances I expect a reform of the patent and copyright market.

How do we Value Art?

The Green Stripe by: Henri Matisse

Girl with a Pearl Earring by: Johannes Vermeer

In our current society there is a reoccurring trend of buying art based solely upon its value, not its atheistic beauty. On another day at another time I would argue for humanity and our culture saying that the idea that we “only buy art based on value” is a falsehood, but I currently find myself between a rock and a hard place. While I want to say we value art based on aesthetic beauty, the trend points in the exact opposite direction of that. While I will not deny that using art as a form of investment can be beneficial to all parties involved in the deal, art should not be only recognized by who signs their name at the bottom. Personally I believe that art needs to be valued upon aesthetic value, but I do see the benefits of using art as a tool of investment. The only issue with putting investments into art is that art is such a subjective market; at any time the piece you invested in could become valueless. With that being said people have many different reasons to buy art. For some it’s because they truly do love the piece and want to own it because they appreciate the time and effort spent. However, hypothetically speaking there are people who are going to buy the last known Picasso because it is the last known Picasso and that painting would be most likely the most expensive painting ever.

During my research for the auction I was given approximately six paintings to do research on. Out of the six the majority of them are currently being held in museums making finding the price of the paintings near impossible. However, through research I can approximate the average cost of a piece of art by a certain artist. For the most expensive painting ever sold painted by Johannes Vermeer the cost was 42 million dollars with premium. A less expensive painter whose most expensive work was 17 million was Henri Matisse. To many people it seems absurd that Matisse’s paintings do not sell for more than they do, but I am not inclined to agree due to the fact that I do not find Matisse’s paintings to be as nice as some landscapes that I have seen from various other artists. For these two paintings that I was comparing the Vermeer was the more pleasing of the two. It just happens to be the more expensive of the two as well. There is a major difference between these two, but they are also similar. While they are both portraits of women, the Matisse is painted with vivid color schemes that do not resemble human tones. The Vermeer is very natural and is plainly a portrait and is not trying to be anything else. Being a fan of realism the Vermeer is the one that most fits that mold. While I believe surrealist paintings are beautiful in their own way, I do personally do not find them as appealing as the realist pieces.  With that being said art is truly subjective and the reasons for liking a certain piece are endless, making the analysis of why people buy paintings a hard subject.

Art in the Beholder’s Eye

Claude Monet, as one of the most expensive artists in the world, has, long after his death, people spending millions of dollars on his artwork. The reason for this is, to me, unclear; to some, art’s value is dictated by use of color, to others the value is derived from subject matter. In short, art’s value cannot be determined using an exact science. Therefore, I do not believe that art in its basic form is a sound financial investment. While a Monet will always have value and is very unlikely to fall in price unless destroyed, the average piece of art is in no way guaranteed to maintain value and as an investment piece would likely underperform. While many people would argue that investing in stocks poses an even greater risk than investing in art, the opposite is true; although the stock market can be volatile, using hard data and projections, it is possible to fairly accurately predict the movement of the stock market, art, however, is based solely on the trends of modern preferences and the price of a piece by Monet for example, cannot be predicted over the long run because there is very little data that exists on any specific piece.

Claude Monet

Using this piece by Monet, Water Lilies, Evening Effect as an example, it is easy to see how art is not a measure of investment but rather a measure for the human experience. I find a certain beauty in this painting that takes me back to my childhood days in Finland, however, the same feeling is not necessarily transferable to all individuals. Others may see it as a conglomeration of paints fit only for the walls of an elementary school. This is the nature of art. Painting is a way of capturing a moment on canvas. Paintings have for millennia been used as a way of recording important events and chronicling the evens of an era. While this piece by Monet may fetch ten million today, fifty million tomorrow, and twenty-four, ninety five one hundred years from now, the image will remain, forever showing us the image of a lake with lilies at evening. The surrealist paintings of the 20th century capture the prevailing moods of the populous and each one tells its own story.

Paintings by Van Gogh, Monet, and Cezanne will likely never lose much value unless the painting is disturbed, and the best of their paintings will always be worth millions. However, investment in such items is simply unreliable. What is bought at auction for 100 million can, depending on the economy or simply demand, be sold for only 80 million at auction in four years. What dictates the price of different pieces of art are of course things such as size and quality (how damaged the piece is), but most of the time a piece’s value is simply a measure of an individuals or groups attachment to an painting. Why else would Card Players by Cezanne be worth over two hundred million more than View of Auvers, also by Cezanne. How we see a piece determines its value, that is why art is more important as a measure of the human experience than as merely an investment. There is a beauty in art not found in the average stock.