Category Archives: Economics

Cloud computing, cloud commuting and risk management

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I’m a big fan of Zipcar for many reasons, among which the least-discussed is that it lets me never worry about car maintenance. I’m one of those auto n00bs that mechanics love to see come through the door: ignorant, anxious, and trusting. So owning my own car is an ongoing maintenance liability: every “check engine” light is yet another opportunity to blow a few hundred dollars on repairs of dubious value.

Zipcar lifts the burden of car ownership and gives me what I want: a convenient way to get to the outlet mall and back. I don’t need to take adult ed classes on auto maintenance nor turn car ownership into a hobby.

Zipcar does for cars what The Cloud does for computing. It divvies up labor and lets specialists deal with issues with far more expertise and much better economies of scale than distributed ownership. We don’t need to know how to change the air filters or set up MySQL to drive to the beach or post a photo album.

On top of efficient division of labor, cloud computing/commuting also distributes risk appropriately. This means that the inevitable lemon car or DOA hard drive is handled as part of a larger batch rather than dumped, hot-potato-like, on individual hapless victims. This also means that consumers, in aggregate, make better choices. When presented with two hard drives — one of which is $10 more than the other, but also 5% more likely to fail — an individual is likely to go for the cheaper option and roll the dice. The cloud, on the other hand, is more likely to make rational cost-benefit analyses. An sysadmin who buys 100 hard drives knows that 5% failure rate means 5 dead drives, not a random gamble.

This kind of logic extends to all sorts of capital goods, including housing. Putting so much capital into a single investment strikes me as somewhat feudal in an era when capitalism argues for diversification and specialization (that is: buy REITs and outsource your real estate management).

What I like best about the cloud approach is that it’s eminently capitalist while capturing the flavor of socialism. We pool our resources, but we pay for what we get within a robust marketplace. (Zipcar will have really succeeded when they face a viable nationwide competitor).

Now I don’t believe that we should completely alienate our cars/condos/computers to some vendor and end up at its mercy. Even as I keep more and more of my stuff on Google and other clouds, I also want the option of backing it up on my own personal hard drives. And yes, some people take deep pleasure in ownership, tinkering with the car or repainting the shed. (I myself just built a new computer this week). But for those of us who aren’t expert mechanics, programmers, or construction contractors (nor friends with one), trustworthy cloud services can help mitigate the risks associated with ownership while tapping into expertise not otherwise accessible.

The environmental mortgage crisis

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David Owen’s recent New Yorker comment, Economy vs. Environment, draws an apt analogy between the mortgage and ecological crises we face. Countless living beings over millennia deposited their saved energy as carbon so that we might burn the resulting coal and oil with less heed than a homeowner on her third subprime equity loan. When you consider how quickly we’ve sent these millions of years up in smoke, our energy profligacy outweighs our recent real estate binge by astronomical orders of magnitude. Yet the vice is the same: squandering hard-earned assets with little thought of caring for tomorrow.

And yet after several years of virtuously foregoing the clothing dryer, I’ve concluded that spending my hours hanging up wet laundry is a backwards step in evolution; we cannot build a modern economy on stone age technology. Clean, sustainable power to fuel a healthy an growing economy — one that lets us all enjoy the amenities of technology, including the dryer — is the only realistic way forward. If we are to redeem our prodigal dissipation of the riches that our ancestors bequeathed us in the form of fossil fuels, it is to make that downpayment on this future way of life.

Obama’s Presidential Library should be virtual

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The Boston Globe’s Mark Feeney asks, “Where would an Obama Library make most sense: Hawaii? Kansas?”

The answer, obviously, is cyberspace. As our first Web-savvy President, Barack Obama should put his Presidential Library online. If his Transparency and Open Government Initiative succeeds, most of the Library will already be built by the end of his term. Then it’s a matter of working with his brilliant Web team to design, curate, and future-proof the space.

Then instead of raising money for one library, put the funds into the public library system nationwide, so all 50 states benefit. That would be a legacy all Americans can be proud of.

The black magic of financial innovation

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Arthur C. Clarke’s third law reads: “Any sufficiently advanced technology is indistinguishable from magic.” What’s the difference between technology and magic? As this blog post points out, “magic” is the halting of inquiry. With that formulation, it’s possible that science can paradoxically plunge us into a second Dark Ages, when the world around us are controlled by forces beyond our ken.

It has become obvious that, among recent technological advances, no field has moved so far so quickly as the world of high finance, specifically, the world of complex derivatives. George Soros testified in 1994 to the House Committee on Banking, Finance, and Urban Affairs, “We use derivative instruments to a much lesser extent than generally believed, very largely because we don’t really understand how they work.” Both he and Warren Buffett restricted their dabbling in derivatives after being seriously burned.

In his 1994 quote Soros didn’t mean that he didn’t know the role derivatives play in the market. Rather, he was pointing out that — like an iPod, or a jet engine — it’s quite difficult to figure out what is going on under the hood of any particular derivative instrument. In other words, they are magic.

Which is not to say that widespread understanding can’t catch up to complex derivatives to make them safer as bona fide financial instruments. Many derivatives have genuine value: consider weather-based derivatives as a hedge for farmers. A heap of regulation to ensure transparency when useful and block abuse when it’s not would help close the gap between financial technology and magic.