Newsflash: Counterfeit Goods are Cheap!

Either I am being dense, or the BBC is:

The man who sparked outrage last year by hiking the price of a life-saving drug may have met his match in some Australian schoolboys.

US executive Martin Shkreli became a symbol of greed when he raised the price of a tablet of Daraprim from $13.50 (£11) to $750.

Now, Sydney school students have recreated the drug’s key ingredient for just $20.

The Sydney Grammar boys, all 17, synthesised the active ingredient, pyrimethamine, in their school science laboratory.

“It wasn’t terribly hard but that’s really the point, I think, because we’re high school students,” one boy, Charles Jameson, told the BBC.

The students produced 3.7 grams of pyrimethamine for $20. In the US, the same quantity would cost up to $110,000.

The issue was never how expensive it is to make the drug, it was who held the license to make it and sell it in the US.

Mr Shkreli, also known as “Pharma Bro”, was chief executive of Turing Pharmaceuticals when it acquired exclusive rights to Daraprim.

Clearly some people don’t realise this:

Dr Alice Williamson, a University of Sydney research chemist, supported the boys’ project through online platform Open Source Malaria.

“They’ve transformed starter material that’s worth pennies into something that has a real monetary value in the States,” she told the BBC.

No, their product has no monetary value in the States.  Let them try to sell it over there and see what happens.

“If you can obtain it cheaply in schools, then there’s no excuse for charging that much money for a drug. Especially from people that really need it and probably can’t afford to pay for it.”

Dr Williamson called the pricing in the US “ludicrous”.

We have a chemist working in research at a university who thinks the price of drugs is driven by the cost of the ingredients, and shit turned out in a school lab is the same as that certified for distribution in the US by the FDA.

Next up from the BBC: Chinese students make a Louis Vuitton bag for $10, undercutting the flagship store on the Champs-Élysées by $490.  Praise all ’round.

Economics at The Independent

The Independent has put out an article on how much employees of various multinationals are “worth”:

Tech companies are famous for the high salaries and bonuses potential candidates get when they join their firm. But the true value of the employee is actually much more, according to new research.

Focusing on the top 100 companies in the world by revenue and the number of employees they have, analysts at Expert Market have worked how much each employee is worth.

Expert Market worked out how much each employee was worth by dividing the revenue of a company by the number of employees and found the following:

Oh dear.  Expert Market don’t appear to have much expertise if this is what they’ve gone and done, and nor do journalists from The Independent.  Revenue divided by number of employees doesn’t tell you much: the company might be making catastrophic losses for all we know, meaning all those employees aren’t adding much value at all.

It is profit, not revenue, that is the measure of a company’s added value and therefore to work out what each employee is worth on average you’d need to divide profits by the employee headcount.  Here’s what they’ve done with Shell:

Shell: £2,681,470.00 per employee

Revenue: £252,058,180,010

Number of employee: 94,000

No, just no.  Look here instead:

Shell 2015

Financial Year Revenue(bn) Profit(bn) No. of Employees Profit per Employee
2015 $265.0 $1.94 93,000 $20,860
2014 $421.1 $14.9 94,000 $158.510
2013 $451.2 $16.4 92,000 $178,260
2012 $467.2 $26.7 87,000 $306,896

Bit of difference, isn’t it?

UPDATE

Alex K. makes some valid points in the comments, and Tim Worstall sets me straight on a similar point here.  I’m learnin’.

A Post About Boilers

Commenter Alex M. chimes in under this post on the subject of boilers, and I thank him for that:

My plumber has a handy sideline reselling perfectly good boilers than people replace because they fall for all the guff about modern energy-efficient equipment. New boilers may use slightly less oil but the savings will never cover the cost of replacing an old serviceable boiler, never mind the much higher maintenance costs and the fact that new condensing boilers are only designed to last around ten years. A bog-standard 20th century non-condensing boiler will last fifty years or longer with regular servicing.

It is probably not surprising that I never owned a property with a boiler until recently.  My employer has always been generous enough to supply me with accommodation wherever I’ve been posted, and the place I bought in Thailand back in 2009 has nothing more than a small water heater for showers and washing up, for obvious reasons.  That changed when I bought a property in Annecy a couple of years ago, a modern apartment which was fully electric (i.e. no gas) and independently heated (i.e. unlike the older apartment complexes, there was no centralised heating system for the whole development).  The boiler was new, so the previous owner told me, and he had receipts to prove it.

When II collected the keys I didn’t even have a place to sit down, and so after looking around I switched off the water and the power and went back to Paris.  That’s one of the advantages of an apartment over a house: you can drop the shutters, switch everything off, and just leave it unattended for months.  Do that with a house and you’ll find things have gotten inside and taken up residence.  Anyway, I made a habit of visiting the place every few months and then switching everything off when I wasn’t there.

I arrived at the property on 22nd December last year, intending to spend Christmas there, and found the boiler leaking.  It wasn’t a bad leak and fortunately there was no damage to my property or that of my neighbour, and I could even still take showers, but something had gone wrong with the boiler.  I found it odd that the leak wasn’t coming from the bottom, but about halfway up.  I couldn’t see any hole but I could feel that below the leak the casing was warm, but above it was cold.  The water was dripping down the inside of the casing.

My first reaction was to swear loudly.  This was 3 days before Christmas, remember.  And plumbers are known to be cheap and readily available, especially with foreigners close to a major holiday, oh yes.  My second reaction was to pull out the warranty.  I called the service number and as I was on hold a passage in the warranty terms caught my eye: the warranty is void if the power has been off for more than 24 hours.  Mine had been off for seven months.

I’m an engineer, mechanical according to the certificate.  Not a good one, but an engineer nonetheless. I know about corrosion and how it works.  I’d suspected the leak was caused by corrosion, but was struggling to figure out how the hull had been breached so fast.  Now I knew.  Modern boilers are made from paper-thin steel to save costs, make them lighter, and make them more energy efficient.  This is inherently sensible.  The problem is corrosion: even the slightest degradation of thin steel will cause a hole to appear.  All boilers deal with corrosion by using sacrificial anodes, but they need to be replaced every few years increasing servicing costs.  You can avoid this by using a powered anode, which does not deteriorate with time but – as the name suggests – needs to be powered.  When I pulled apart my boiler I found a small 9V battery underneath: that would be the emergency supply when the main power is switched off for whatever reason.  The anode wouldn’t need much power, but a 9V battery is not going to keep it working for seven months.  As such, the anode stopped working and the boiler itself corroded in short order.

This all came as a surprise to me.  The house in which I grew up in rural Wales had a boiler, which from memory was made of steel an inch thick and probably needed a crane to install.  If the anode lost power there would be enough allowance in the steel to withstand months or even years of corrosion before springing a leak.  But modern boilers have no such margin, they will be made using thin steel and will become useless at the slightest sign of physical degradation.  So you have to keep the damned things powered up.

I was fortunate enough to find a decent plumber in Annecy who replaced it on 23rd December with a better one for 1,200 Euros including installation, taxes, etc.  It was a bit of a dent in the wallet, but it didn’t mean Christmas was ruined.

This isn’t a rant about disposable boilers, though. Old-style boilers might last forever, but that comes at a cost too: you need a strong floor to put them on, and you certainly can’t hang them from a wall like you can the modern ones.  You also can’t install them with one person and another one helping, you’d need some serious kit to move them in and out.  And they’d also be more expensive to run.  There is a reason why modern French apartments are all electric: heating technology and insulation has gotten so good that you no longer need a heavy, industrial central heating system or a gas-fired boiler, and all the equipment you need can be bought from a DIY store and chucked in the back of your car (just about).  In the long run, I suspect the savings on heating costs would easily pay for replacing the boiler once every ten or fifteen years (though perhaps not every seven months).

But there’s another point, which as an employee of an oil company I understand well: CAPEX versus OPEX.  Most people would rather pay for a cheap boiler and replace it every ten years – $700 up front, then two $1,000 payments at year 10 and 20 respectively, totalling $2,700 – than pay $2,000 up front on Day 1 and not pay anything for the next 20 years.  What do economists call it?  The time value of money, or something.

And that’s the real benefit of modern boilers: they are cheap according to the price tag hanging off it in the shop.

Les Brocantes

As a follow-up to yesterday’s post on the folly of diverting Sweden’s labour pool to repairing bicycles instead of just letting white collar professionals buy replacements, I want to talk about the very French event called a brocante.

As the linked site says:

The flea markets, second hand markets and car boot sales are very popular in France especially in the summer and before Christmas, in fact, that’s an understatement – it seems to be the national pastime to spend weekends visiting the different types of second hand markets.

Some of these brocantes are permanent, but the ones I have seen are held periodically in each suburb perhaps once or twice per year.  The local municipality closes off a few streets and sets up collapsible tables and the local residents come out with all their old junk and spend the day trying to flog it.   These events are very popular and people pack the streets, but from my observation most of them are just nosing around and not buying anything.  They can also be a pain: I woke up one Sunday morning in June to find a brocante going on in my street; clearly I’d not bothered reading the signs that had been posted.  As such, I couldn’t get my car out of the underground car park to go anywhere.  The French expression governing what to do in such a situation is “toff sheet”.

A brocante is basically the French equivalent of the British car-boot sale or jumble sale, or the American yard/lawn sale.  They are also similar to the school fetes which used to go on in the 1980s when I was a kid, where parents would bring junk they wanted to sell.  I have no idea if this still happens.

It might be my memory playing tricks on me, but I seem to remember the jumble sales and school fetes of my childhood turning up some bargains for my various family members.  Decent books were a favourite, and I managed to snag myself a hardback second edition of The Lord of the Rings for 50p back in 1992 which I still have.  But you also stood a chance of finding a good piece of furniture, some tradesmen’s tools, gardening equipment, kitchenware, sports gear, and other items which were bargains in the sense that to buy them new would cost a lot more, assuming they were available.  I recall people used to get quite excited by what you could find, myself included (I was usually after piles of old Beano and Dandy comics).

By contrast, when I walked around the brocantes of Parisian suburbs I found there is little of any value and nothing that could be considered a bargain.  It is mostly toys, children’s clothes, shoes (I always wondered who bought second-hand shoes; that was the one item that was not hand-me-down when I was growing up), and obsolete rubbish like CDs, VHS cassettes, and mobile phone chargers.  You might find the occasional fishing rod or ski gear, but not much else.  Even the books seem to be junk, very little by way of early edition hardbacks and lots of Da Vinci Code.

I think the reason for this is that a lot of stuff is so cheap now that when it breaks it is simply thrown away and replaced:, e.g. tools, kitchenware, and furniture for example whereas before this stuff could stay in a family for generations before being packed up for a jumble sale after a clear-out.  Perhaps another reason is that nobody would buy items which can break, e.g. kettles, microwaves, lawnmowers, DVD players, bicycles, drills, flashlights, etc. when buying one brand new with a warranty is only marginally more expensive and people have more disposable income.  There’s also the effect of eBay: there is no need to trawl through jumble sales looking for an obscure item at a bargain price when you can do that sat on your sofa with an iPad.

In short, things getting cheaper and more readily available has killed the second-hand market for many items which would have appeared in jumble and car-boot sales a generation or two ago.  It’s the same reason why people are choosing to replace broken appliances and other items in Sweden rather than having people fix them.  It is nice to engage in a nice spot of nostalgia about going through a jumble sale and finding a set of vintage cast-iron kitchen scales for a fiver, but the very fact such an item was being traded second-hand shows they were expensive new and not within reach of everybody.  Cast-iron kitchen scales might look nice, but it is probably better that every household can now buy an electronic set for ten quid in Argos and there is no second-hand market any more.  It’s called progress, and it’s a sign we are all better off.

Perhaps the Swedes ought to have taken a wander through a brocante or two before meddling with their economy.

Sweden’s Economic Brainwave

I’m sure Tim Worstall will get around to this, but I’m going to tackle it anyway.

To combat its ‘throwaway consumer culture’, Sweden has announced tax breaks on repairs to clothes, bicycles, fridges and washing machines. On bikes and clothes, VAT has been reduced from 25% to 12% and on white goods consumers can claim back income tax due on the person doing the work.

Years ago I had a Russian friend who moved from Dubai to Sydney.  Within a few weeks of her arrival she told me she found some aspects of living in Australia frustrating.  The example she gave was that she needed an old, decrepit wardrobe removed from her house, only to do this she had to call a removal company which could come some time next week and charge $200 for the job.  Whereas in Russia, she said, you just find a couple of alcoholics and buy them a bottle of vodka or two and they’d happily do it.  They’d probably go on to sell the wardrobe, too.

One of the big differences I noticed while moving between countries as economically diverse as France, Nigeria, Australia, Russia, and Thailand is that the wealthier a country is, the more difficult it is to get simple repair or semi-skilled trade jobs carried out.  The reason for this is obvious: as a country gets wealthier and more educated, the value added by each individual in the workforce increases, and a lot of low-value jobs simply disappear.  For example, in a poor country a guy can make a reasonable wage repairing bicycles: it might be the best way for him to make money and other people can’t afford to just buy a new one.  Whereas somebody living in London can make more money doing almost anything other than repairing bicycles, and he’d anyway have to charge so much that customers would find it easier and possibly cheaper to just buy a new one.  Economics, in other words.

You would therefore expect a developed country with an educated population like Sweden to have its workforce employed doing high-value jobs: technology, services, manufacturing, etc. rather than low-skilled jobs like repairing clothes.  And funnily enough that’s what they have, but now they’ve decided this ought to change:

The incentives are intended to reduce the environmental impact of the things Swedes buy. The country has ambitious targets to reduce greenhouse gas emissions, but has found that the impact of consumer choices is actually increasing.

They appear to have stumbled on the concept that a low-tech economy in which consumers have fewer choices produces fewer greenhouse gases.  Now they want to move to such an economy, which is in the precise opposite direction everyone else is moving.  We have the developed world.  We also have the developing world.  Sweden wants to kick-start the undeveloping world.

The scheme is expected to cost the state some $54 million in lost taxes, which will be more than outweighed by income from a new tax on harmful chemicals in white goods.

Erm, okay.  But isn’t the point of this new scheme to reduce the number of new white goods being bought?  So if it is successful, this new tax take won’t materialise, will it?

Moreover, Sweden’s economy is growing strongly and the government has an $800 million budget surplus.

My bank account is in surplus.  I’m therefore going to quit heart surgery and take a job in McDonald’s.

I interviewed the man behind the scheme, deputy finance minister Per Bolund, a member of the Green party and a biologist by training.

Ah.

He spoke about nudging people towards better choices; creating jobs for skilled manual workers; and Sweden’s six-hour working day.

Moving workers from skilled to semi-skilled jobs is a better choice?  This doesn’t seem to be consistent with the history of the human race.

I think many of us have had a bike standing around broken and we don’t fix it and then start using other modes of transportation.

Which suggests the individuals concerned aren’t so interested in riding a bike, doesn’t it?

This will expand the number of companies giving these kinds of services, so it’ll be easier for consumers to have things repaired.

How many unrepaired bikes are lying around in Sweden, exactly?

And sometimes you can be surprised by how a small change in fees can really change behaviour.

Oh no, we are quite aware of how fees – especially taxes – can change behaviours.  For example:

And in white goods, the tax break is actually quite substantial since most of the cost of repair is actually labour, so it can really make a quite big difference.

You’ve taxed labour to the point semi-skilled jobs have vanished.  Now you need a tax break to bring them back again.

It’s actually a tax on chemicals. So if the appliance has harmful chemicals in the production process or incorporated in it there will be a levy, but if, on the other hand, you decrease the amount you can actually get a much lower levy, or even a zero increase. So that will give an incentive to producers to decrease the use of harmful chemicals, and we know that appliances are a major contributor to the amount of them in the everyday environment.

Great.  But what if by using less of the harmful chemical the appliance becomes less efficient, thus needing more power for the same performance?  I’m pretty sure this would apply to a fridge or air conditioner.  I’m also pretty sure nobody has thought about this.

The idea is to help the private and municipal sectors use nudges to make it easier for consumers to act responsibly and reduce their environmental impact with everyday choices.

Translation: we’ll make you pay more if you live in ways of which we don’t approve.

We don’t anticipate that this will make people avoid buying things overall, but hopefully it will be easier for people to buy high-quality products because they know it’s affordable to have them fixed if something breaks. So it’s a lessened incentive to buy as cheap as possible and then scrap something.

People generally buy high-quality products because they don’t want them to break.  Nobody buys a high-quality product thinking it is a smart purchase because when it breaks, Olaf from around the corner can fix it on the cheap.  All people will do is buy the cheaper (and probably less efficient) appliances and get them fixed if and when they break.  The high-end appliances, subject to the “harmful chemical” surcharge, will suffer a drop in sales.  And I bet the repairs will still be too expensive compared to scrapping and replacing goods made in China.

And we also know that repairs are more labour-intense than production, which has been largely automised, so expanding repairs could actually contribute to an expanding labour market and a decrease in unemployment.

So you want to go from a lower-cost, automated process to a high-cost, manual process to achieve the same result?  Progress!

Especially because repair services often require high skills but not very high education,

Highly-skilled jobs requiring no education.  I suppose this is the theory underpinning Sweden’s immigration policies.

so we believe there’s a currently unemployed part of the labour force that could benefit.

Why not get them doing jobs that need doing, rather than getting them to do tasks which without meddling with the tax system nobody has a demand for?

Of course it is a boost for the local labour market because repairs are by their nature done near where you live. So hopefully this will contribute to the growth of jobs locally all over the country. Whereas large-scale manufacturing is very centralised and can only happen in a few locations around the nation and internationally.

A blast-furnace in every garden!

We’ve managed quite well to decrease emissions within Sweden – by some 25% since the early 1990s – but we see that the environmental effects of consumption are actually moving in the opposite direction, they’re increasing. And since Sweden wants to be a leader in sustainable development on a global scale, we feel a responsibility to do what we can domestically to decrease the impact of consumption.

No new bike for you, Erik!  The government has decided you must get your old one fixed.

What do you think of the six-hour working day, which is being tried in Sweden?

There’s no national scheme, but municipalities and private employers have tried it, and in general found it quite beneficial for the labour force. They experience better working conditions and you can see some effects when it comes to health, you get fewer sick days.

The fewer hours people work, the fewer hours they spend off sick.  Who knew?

And what I think will really change consumption patterns is the growth of the sharing economy, which has so many benefits for the individual – getting easy access to things like vehicles without the responsibility of ownership and maintenance. That could be a game-changer.

Oh, it’ll be a game-changer all right.  Look at how well the Soviets got on with collective farms which had no responsibility of ownership or maintenance for machinery and vehicles.

I think this is what happens when you make a biologist the deputy finance minister of a country.

More Food for Thought

A friend has pointed out that in yesterday’s post about supermarkets and expired food I overlooked the practice of their deliberately destroying the food that goes into their bins.  The complaint of many seems to be that supermarkets do this simply because they don’t want poor people hanging around their bins.  Taking this at face value, it would sound pretty callous that supermarkets are denying hungry folk food simply because – for whatever reason, but probably because they are just bastards – they don’t want poor folk nearby.  Or maybe they don’t want poor folk feeding themselves for free when they can be forced into paying for it?

But there are valid reasons why supermarkets wouldn’t want this, aside from their just being bastards for fun.  Having anyone regularly rummaging through your bins is probably going to come with additional problems, such as people camping semi-permanently beside them waiting for food to be dumped and being a nuisance for staff and the public.  Private householders wouldn’t want people in their back yard rummaging through their bins, so I don’t see why supermarkets would be happy about it.

But in reality it feeds in (sorry!) to the main point I made yesterday regarding liability.  A company is still responsible for its waste products up until custody changes hands in the collection process.  A supermarket has a duty of care towards the public which includes doing everything reasonably practicable to ensure they are not harmed by its operations and products, which includes the waste food as it lies outside discarded in the bins.  This will also include ensuring nobody will come to any harm if they decide to climb into the bin to eat something: if somebody does so and injures themselves somehow, the supermarket is liable.  Stupid, but this is how the law works.  The supermarkets are also liable should somebody fall ill by consuming waste food which by the supermarket’s own definition is unfit for consumption.  The supermarkets are especially liable because they know in advance that people will try to gather and consume this stuff, so they cannot claim ignorance for not doing more to prevent it.

And this is the issue: the supermarkets are legally obliged to prevent people from eating out of their dumpsters.  If they just leave them open and unguarded, they are being criminally negligent in their duty of care towards the public.  And this is what the campaigners don’t get: those among their numbers have imposed these rules and regulations and set these legal precedents and this is the result.

Supermarkets have two realistic options here: secure the bins in such a way that nobody can get at them, or destroy the food so thoroughly that nobody will try.  This new law will be discarded as soon as a liability case arises, it is pointless posturing by the wealthy middle-classes.  If the welfare programmes that exist to ensure nobody goes hungry are failing, they need to be fixed: but that would likely involve shaking up bureaucracies and firing useless managers, and that would never do.  So instead they take a cheap swipe at the supermarkets for dealing with a set of conditions that they themselves created.

Will Pike and the Costs of Legislation

There’s another video doing the rounds on social media made by a chap called Will Pike, a Brit who was injured in the 2008 Mumbai terror attacks and is now wheelchair bound.  It goes without saying that I have every sympathy for Mr Pike and his predicament, and I can imagine the frustration he feels when he encounters the difficulties presented in the video:

His problems are real, and I take no issue with them.  But I have a problem with his proposed solutions:

The law protecting disabled people from discrimination when accessing goods and services has existed for 10 years and is supposed to be enforced by the Equality and Human Rights Commission. The Equality Act requires that service providers make reasonable adjustments to make sure disabled people are not disadvantaged when accessing their services. However, there are significant flaws with the enforcement of the act. In the majority of cases it is left to disabled people to sue service providers for discrimination. Moreover changes to legal aid have made it much harder to start legal action. Court proceedings can be very time consuming and costly. They are not accessible to all disabled people, many of whom just want to get on with their life.

The main issue here is one of expectations versus reality of what passing a law can achieve.  Since I was a student and I became aware of these things there seems to have been a headlong rush in the developing world to solve every problem in existence by passing a law, as if by doing so the problem merely goes away.  Only if this worked, nobody anywhere would be doing drugs.  Oops.

The key word in the legislation is “reasonable”:

The Equality Act requires that service providers make reasonable adjustments…

What is reasonable or not depends on the individual.  Most viewers of the video would see a flight of steps in a clothing store and think “Why can’t they put a lift in?”  A building services expert hired to testify on behalf of a company defending a case brought before the EHRC would explain in detail the costs and practicalities of doing so, and an engineer would go further, into details of the structural design of the building.  London is an old city, the buildings are old.  Retrofitting a lift or making substantial modifications to a building could well cost as much as demolishing it and building a new one.  Not in all cases for sure, but in some.  It could be that the owner of the shop premises doesn’t own the whole building, or maybe even the floor above.  Whatever the case, it is not immediately obvious that the lack of a lift in a shop means the owners or the tenants have not made all reasonable adjustments to allow disabled people access to their services.

There is one answer to this.  Take away the “reasonable” qualifier and ensure all companies provide full disabled access that caters for every type of individual that might cross their threshold.  This would cost a phenomenal amount of money, which would be passed directly onto customers, and would entail moving almost every business out of city centres and into purpose-built retail parks or strip malls, but it is certainly possible.  Only major complaints I hear from the sort of people who campaign for greater disabled access are: the cost of living in Britain (especially London) is already way too high and we need government intervention to force companies to pay employees a Living Wage; town centres are dying and everything is moving to purpose-built retail parks in the outskirts; and independent “local” shops are disappearing, replaced by endless outlets of multinational chains who “send their profits overseas and out of the local community”.

So which is it to be, folks?  Strip-malls filled with faceless multinationals with full disabled access, or smaller franchises and independent shops in city centres and high streets?  You can’t have both for simple reasons of practicality and economics. And if you insist on having both, you’ll end up with neither: nobody is forced to open a shop, and anyone doing so much be able to envisage an economic return.  Sadly, I suspect people will insist on having both and wonder why their towns look empty.  This has already happened.

I have my sympathy with Will Pike and his video might well have identified companies that could have provided better access at a reasonable cost but didn’t.  But I suspect most people sharing his video on Facebook won’t have thought much beyond the initial, emotional reaction to a guy in a wheelchair struggling through life.

Food for Thought

Earlier this year France passed a law banning supermarkets from throwing away or destroying unsold food.

France has become the first country in the world to ban supermarkets from throwing away or destroying unsold food, forcing them instead to donate it to charities and food banks.

Charities will be able to give out millions more free meals each year to people struggling to afford to eat.

I’m not sure when the ban actually comes into effect, but there has been a recent spate of articles doing the rounds on social media about how wonderful this is and how the US should adopt the same laws.

The narrative is that supermarkets are callously destroying food while the starving, huddled masses are gathered outside their automatic doors pleading for some sweepings from the delicatessen floor.  Why not just give this food away?

I can already think of two reasons why not, with the first being that of liability.  I haven’t visited every supermarket in France, but I know British supermarkets pretty well and if you go to one in the late evening just before closing you see a section filled with produce expiring that day which has been marked down, and further marked down, and then reduced to almost nothing in a desperate attempt to get rid of it before it goes in the skip out the back.  As far as I know this is common practice among supermarkets everywhere, and there are a lot of people out there who have made buying groceries from these sections an art form.  In other words, supermarkets already go to considerable lengths to avoid destroying food.

There is a good reason why expiry dates are put on food, and it’s mostly to do with liability and ensuring the customer is adequately informed.  Present in the contract a customer enters into with the supermarket when he or she buys a product is the expectation that the food is fit for consumption; the onus is therefore on the supermarket to adequately inform the customer when he or she should consume it before it goes bad.  The dates on the products might be a bit conservative and sometimes even silly, but they exist in order to ensure the customer is informed and the supermarket has carried out its duty of care to the best of its ability.  If they fail in this duty of care and a customer gets ill, they can and will be sued for compensation and suffer a loss of reputation.  This is why supermarkets will not take the risk of selling food past its expiry date: customers could get ill, and both parties will suffer.  All of this is entirely sensible across a colossal, multi-billion dollar, international logistics operation – and it remains sensible even if somebody can pick up a can of beans a day past its expiry date and say “Oh, this is stupid, they are still perfectly edible.”

So what’s the supermarket to do with those few items they can’t sell before their expiry date (and as a percentage of overall stock the volumes will be tiny, even if the poverty campaigners will cite numbers which sound large in isolation)?  The most sensible and cost effective thing to do from a business and liability point of view is to toss it into a skip and replenish the shelves with fresh stuff for the hungry customers who come in the next morning, and indeed that is what they do.

But now they are being forced to give away food which they have deemed unsuitable for sale to their customers, several problems will arise.  The first of these is actually mentioned in the article, but being The Guardian they’re too dense to follow through:

The law has been welcomed by food banks, which will now begin the task of finding the extra volunteers, lorries, warehouse and fridge space to deal with an increase in donations from shops and food companies.

Lorries, warehousing, refrigeration, and distribution all cost money.  And by far the best people at doing these operations are supermarkets, as evidenced by their commercial success.  So if the supermarkets, with all their expertise, have decided these operations aren’t worth doing for certain items, maybe they are onto something?

But now the supermarkets have handed over the food, who is going to pay for these operations?  Where is the money for the refrigeration going to come from?  And more importantly, who is responsible for ensuring these products are handled and stored properly such that they are still fit for consumption when handed to the recipient, and that the recipient is correctly informed as to when he or she should consume it?  The expiry date on the package has already gone by, remember?  That was yesterday.  Are a team of volunteers and charities seriously going to be able to manage the receipt, storage, and distribution of thousands of tonnes of food at or near its expiry date such that nobody is going to get sick?  Are these charities and volunteers going to accept responsibility if somebody gets food poisoning and dies?  If not they, then who?

What’s happened here is some (undoubtedly wealthy middle-class) busybodies have decided they can effectively extend a supermarket’s operations beyond their doors at no cost and with no accountability, and now this has become law.  I suspect the liability issue alone will prevent this being adopted in the US, there would be lawsuits within the first month.  Only against Wal-Mart, probably.

There’s also another problem with forcing supermarkets to give away products, one that we’ve seen with food banks in the UK: some people will take the free stuff instead of doing regular grocery shopping.  Supposing a supermarket sectioned off a corner of its floorspace, filled it with free products, and opened it up to the public for an hour after normal shopping hours.  Now repeat across the country.  Very quickly this would be captured by organised third parties who would employ people (of the type you see on nightclub doors in Manchester) to swoop in and collect everything on offer in what would become a large-scale industrial operation: just as charity clothing has become a lucrative, large-scale, international business.  The idea that a little old lady whose pension won’t stretch to three meals per day would be able to get free food is ludicrous.

If people are substituting products they would have paid for with free stuff, the supermarkets (or the wholesalers) will be losing revenue.  Yes, it is true: if supermarkets are forced to give away products they would otherwise have destroyed, they will lose revenue because of the substitution effects.  This will either result in a fall in profits for the supermarkets – which is what the campaigners think will happen – or, more likely, they’ll just distribute the costs of the new law among the sale prices.  In other words, food will get more expensive.  How does that help the poor, again?

Practicalities aside, this whole thing is annoying me on another level.  For the first time in human history we as a species are able to produce and distribute enough food so that real hunger in properly-run countries is something only our grandparents knew about.  We do this so effectively we can feed ourselves and our families without any more inconvenience than a quick trip to a nearby supermarket.  Furthermore, we can obtain our food without worrying if it’s going to kill us if we eat it.  This in itself is one of the most astonishingly, staggeringly, brilliant outcome that humankind has managed in its existence.  We have solved the millenia-old problem of constant hunger.  So what do we do?  We moan like fuck and attempt to sanction those who have brought it about.  Like the attempts to dismantle our reliable energy supply and replace it with one that doesn’t work, historians are going to look back on this era and think we went collectively insane.

People do go hungry in the developed world, I don’t deny that.  This is why we have a welfare system, food stamps, charities, and a whole load of other measures in place to do what we can to alleviate poverty and hunger.  Supermarkets and their stock-management practices are not the problem, by contrast they are the very things that are keeping the majority of us fed so that we have enough surplus wealth and energy to help those who are not.

Finally:

Campaigners now hope to persuade the EU to adopt similar legislation across member states.

And people are wondering why Britain voted to leave.

Russia sanctions itself further

Not content with denying themselves the pleasures of French cheese and Norwegian salmon at prevailing (i.e. non-smuggled) market rates, the Russian government has now decided its citizenry doesn’t want to go on holiday to Turkey:

“Some things are more important than beaches, the sea and all-inclusive holidays,” anchorman Dmitry Kiselyov boomed in his influential weekly news round-up on state television.”

Such as the egos of politicians.

It’s the second popular destination to be banned in under a month. Flights to Egypt were halted in early November, following a terror attack on a plane full of Russian tourists.

When Egypt’s beaches became inaccessible, many Russians were re-directed to the Turkish coast.

And with the collapse of the rouble making Asia beyond the reach of most Russians, the number of holiday destinations from which they can pick is dwindling rapidly.

Still, people here seem broadly resigned to what has happened – even supportive.

“I think it’s the right response. Turkey has shown it’s a traitor,” said Andrei, taking a cigarette break from work, out in the snow.

Was Andrei planning on going to Turkey, then?  If not, his words are somewhat cheap.

Scheduled flights to Turkey are still running and the embassy stresses that Russian tourists are welcome. A spokesman said there were no plans to introduce visa requirements for Russians, despite Moscow doing that for Turks.

That’s because the Turks understood what Joan Robinson meant when she said “if your trading partner throws rocks into his harbor, that is no reason to throw rocks into your own”.

But any travel agencies caught selling Turkish tours have been warned they face sanctions.

Russia’s Federal Tourism Agency argues the ban will have a “hugely positive” impact on domestic tourism.

Well, yes.  The foreign travel policies of the USSR were also a great boon for domestic tourism too.  Just not from the point of view of the tourist.

Its head sees Russians opting for “staycations”, injecting their holiday funds into the local economy instead.

Opting to stay at home in the face of a ban on doing otherwise?  Some option.

They point to a lack of hotel capacity in Russia and poor infrastructure: “Patriotic” resort choices don’t generally offer the quality those who holiday abroad have grown used to.

No shit.

So travel agencies are offering them European destinations like Spain and Greece as alternatives – as well as Thailand and Vietnam.

Good luck with that Schengen visa process, folks!  Or the 13-hour flight plus a Thai baht which has doubled in value against the rouble in the past 2 years.

The business sanctions could hit Turkey much harder, albeit again at considerable expense to Russia:

Russia has announced a package of economic sanctions against Turkey over the shooting down of a Russian jet on the Syrian border on Tuesday.

A decree signed by President Vladimir Putin (in Russian) covers imports from Turkey, the work of Turkish companies in Russia and any Turkish nationals working for Russian companies.

A lot of the construction work in Russia – shopping centres, housing complexes, infrastructure – is carried out by Turkish companies, who exploit the fact that they can mobilise a sizeable, cheap workforce of their own countrymen to Russian cities which lack local expertise and manpower.  In short, Turkish companies have filled a gap in the market left open by Russians who either cannot do the work, or cannot do it at a competitive price*.  If these companies and their workers are now going to be booted out of Russia, future building works in that country are going to become very expensive or cancelled altogether.  I wonder how those Russians who have placed deposits on apartments in partially-completed developments being built by Turks feel right now?  Holidays destinations are probably the last thing on their minds.

*This reminds me of a joke, which I heard told by a young Russian man to answer a question some foreigners had put to him as to why it was so hard to do business in his country, and goes as follows.

A Russian city needs a bridge built, and so puts out a call for tender to three construction firms: German, Turkish, and Russian.  The Germans say they will build the bridge in 1 year and it will cost $20m.  The Turks say they will build the bridge in 2 years for $10m.  The Russians say they will build the bridge in 2 years for $50m.  The Head of Public Works in the city stares goggle-eyed at the Russian proposal, and brings in the company president to explain:

“How come your proposal is so high?” he asks.

The president of the Russian construction company smiles and says “$20m for me, $20m for you, and we’ll get the Turks to do it for $10m!”

Incentives matter, so best not ignore them.

A story was doing the rounds last week that was drawing praise and admiration from various quarters:

The idea began percolating, said Dan Price, the founder of Gravity Payments, after he read an article on happiness. It showed that, for people who earn less than about $70,000, extra money makes a big difference in their lives.

The idea began percolating, said Dan Price, the founder of Gravity Payments, after he read an article on happiness. It showed that, for people who earn less than about $70,000, extra money makes a big difference in their lives.His idea bubbled into reality on Monday afternoon, when Mr. Price surprised his 120-person staff by announcing that he planned over the next three years to raise the salary of even the lowest-paid clerk, customer service representative and salesman to a minimum of $70,000.

If it’s a publicity stunt, it’s a costly one. Mr. Price, who started the Seattle-based credit-card payment processing firm in 2004 at the age of 19, said he would pay for the wage increases by cutting his own salary from nearly $1 million to $70,000 and using 75 to 80 percent of the company’s anticipated $2.2 million in profit this year.

Those doing the praising were generally of a left-wing bent, and some went so far as to say this was a vision of the future and an example for other firms to follow.  Me, I’m not so sure, and I think Mr Price’s company is going to run into trouble over this at some point.

Now I’ll start by saying that Mr Price is perfectly within his rights to distribute his own salary among the workforce in such a manner.  And as I understand he is the owner, hell he can pay them $1m per year to watch TV for all I care.  I just don’t think he’s thought through the implications.  There are several problems which I think will arise, all of them to do with incentives.

The paychecks of about 70 employees will grow, with 30 ultimately doubling their salaries, according to Ryan Pirkle, a company spokesman. The average salary at Gravity is $48,000 a year.

His idea bubbled into reality on Monday afternoon, when Mr. Price surprised his 120-person staff by announcing that he planned over the next three years to raise the salary of even the lowest-paid clerk, customer service representative and salesman to a minimum of $70,000.

Firstly, if the lowest paid clerk is now on $70,000 per year there is almost no incentive for anyone to grow professionally by taking on more responsibility, tackling harder tasks, volunteering for the shit jobs, and putting in additional hours to increase their own value within the company.  If the clerk is on $70k, why would somebody from the middle-ranks with marketable skills and a higher education apply themselves if they were on similar wedge, or work extra hard just to earn $80k when by loafing he can earn $70k?  Better to take it easy and spend more time with the family.  And this will be made worse by the plan being phased in over 3 years.  Who is going to be interested in the new night manager role now the main incentive to take the crap hours is gone?  This will be felt even more keenly in sales: how much effort is the junior salesman going to put in now he’s on $70k per year?

Secondly:

Hayley Vogt, a 24-year-old communications coordinator at Gravity who earns $45,000, said, “I’m completely blown away right now.” She said she has worried about covering rent increases and a recent emergency room bill.

“Everyone is talking about this $15 minimum wage in Seattle and it’s nice to work someplace where someone is actually doing something about it and not just talking about it,” she said.

From the above quotation I think it is safe to assume that Hayley Vogt will never leave Gravity of her own free will because she is now paid 55% above market rate for being a communications coordinator.  Nobody above her is going to leave either, so it is an equally fair assumption that as long as Gravity exists, Ms Vogt – currently 24 – will be a communications coordinator.  So by the time she’s 40, Ms Vogt will still be a communications coordinator.  Do you see the problem here?  She’s undergone no professional growth.  She can’t be promoted internally because her superiors – also being paid well over market rate – will hang onto their jobs for all they’re worth.  So if Gravity goes tits-up in the future, Ms Vogt will find herself on the job market not only facing a severe cut in her income but also competing against people much younger from whom she cannot differentiate herself in any meaningful way.  For those on the lower rungs doing jobs which don’t require much skill or training, and thus youth, energy, and flexibility are major selling points, this could be a problem.

Of course, many people doing those kind of jobs aren’t looking for a career anyway, they just want to pay the bills.  Which brings me onto the third problem: with nobody leaving, how do you get rid of the underperformers?  Normally these people would leave because, having been passed over for promotion and higher pay for a few years running, want to try their luck somewhere else.  Now Mr Price is stuck with them.

Finally, how does Mr Price intend to bring new talent into the company?  Nobody is leaving, so that means only newly created positions will bring outsiders in.  Aside from not being a very healthy environment for any company, this creates an additional problem.  If a new position is created and advertised, every store clerk within 200 miles is going to apply for the job if it pays $70k per year.  Having an avalanche of CVs hit your desk is not helpful. When I worked in Dubai we advertised for an assistant accountant position and put an advert up somewhere.  Even though we were a small, unknown company we were receiving CVs by the thousand, mostly from Indians.  The problem was almost all the CVs were from labourers, forklift drivers, and other unskilled workers chancing their arm having seen a “big” salary (and indoor work) on offer.  Sifting through them all, trying to identify who was genuinely interested in the position and had the matching skills was a hopeless task.  Gravity Payments is going to find themselves with a similar problem: how many of the tens of thousands of CVs they will receive are from people who aren’t motivated solely by the incredible pay and couldn’t care less about the actual job?  And even those who are qualified, are they confident they will secure a suitable candidate from a shortlist all of whom are overwhelmingly motivated by the pay above everything else (and know they can likely loaf once they get in)?  HR departments in major oil companies will recognise this problem.

Despite his obvious success in business thus far, having set up Gravity Payments at he impressively young age of 19, I can’t help think Mr Price is still a bit wet behind the ears:

“Is anyone else freaking out right now?” Mr. Price asked after the clapping and whooping died down into a few moments of stunned silence. “I’m kind of freaking out.”

Whilst I might be persuaded that executive pay is too high in the US and the disparity between the lowest and highest paid is too wide in some companies, progressive pay scales are used and market rates adhered to for good reasons which might not be immediately obvious.  As Tim Worstall is fond of telling us, incentives matter.  Mr Price might end up learning this the hard way.