July 8th Links

• "My biggest fear," he confessed, "is that there will be a huge earthquake while we're gone and I'll miss it." It would be like a bird-watcher missing a rare hawk he has been waiting his whole life to see. [Wired]
• A lot of car enthusiasts make fun of Ferrari owners, since the typical car only covers about 2,000 or 3,000 miles a year. In the last year, I put just over 5,000 miles on mine, and I discovered the reason why most Ferrari owners are so sparing with their mileage: these cars are difficult to drive. One reason is simply time. A few months ago, a friend perfectly summed up this car to me: it's a Point A to Point A car. In other words: this isn't a car you use to go somewhere. It's a car you take out of your house, and drive around for a while, before you return to your house. You don't go to the mall in it. You don't take it to dinner. You can't pick up anything large, and you can't transport more than one person. It's not a vehicle you use. It's a toy to be played with. And therein lies the problem: most Ferrari owners don't get to the point of owning a Ferrari by having large blocks of free time they can devote to aimlessly driving around for several hours. So the cars sit, and sit, and sit, except for that one weekend, in between business trips, when the weather is nice, and the wife and kids are at the museum, and the house is clean, and the car is in good, working order. As you might imagine, this only happens a few times a year. Roughly two thousand miles worth, I suspect. [Jalopnik]
• Like many small banks, maintaining this as a going concern seems to be of dubious value to shareholders, compared to the immediate return (and opportunity to redeploy capital) that they would get if the bank were sold. Instead, its purpose as a company might perhaps be better understood either as a jobs program ($1.65 million of salaries) or as civic monument with a copper cupola. One could look at the non-interest expenses is as percentage of assets or as a percentage of equity (which is obviously multiplied by the leverage of the bank). So, the $3.1 million of total non-interest expense for 2018 was 2.7% of the year-end total assets. If the bank can maintain its net interest margin (which may be tricky with short term rates higher than what they paid on deposits last year), this situation might continue indefinitely, even though it may not be the most efficient use of shareholders' capital or the most efficient way for society to provide deposit and lending services to rural northern Alabamans. [Oddball Stocks]
• The first year after we were gone, the Super Soaker volume dropped from $125 million to $25 million. We were told that as soon as we were out of the business, our competitors knew they could make the knock-offs and get them into the stores. They knew Hasbro wouldn't enforce their patent rights as strenuously as we did. The problem was that Hasbro had so many great products to sell — all the great lines that Hasbro carries — and the Super Soaker was just one line to them. With us, there was really only one product. The Super Soaker to us was the company; that was what we lived and died for. [link]
• Ever since the fiasco in the Garden of Eden, most of what we get is by sweat, strain, and anxiety. Two villains – nature and other people – prevent us from getting what we want. Nature is niggardly: it provides fewer resources than we could use, and much of what is available is made useful only by hard work. As for other people, the problem stems not from malevolence: their wants and ours simply exceed what is available. [Armen Alchian]
• Stores that sell clothing have the special problem that their merchandise comes in a large range of individually-different sizes. That means they have to constantly sort stacks or racks of clothing into neat categories so customers can find their own sizes. If cost-cutting leaves too few store clerks to tidy up after customers, it quickly becomes very difficult or impossible for customers to find their sizes. So they stop coming in. Untidy piles of clothing are a sign of a bankruptcy feedback loop. Watch for these in clothing stores. [CBS]
• It seems like the Chinese will be the ones to organize and colonize Africa, because they don't have white guilt or Christian sympathy for the weak. One problem that the Egyptians have, and a reason they need outside organization, is low literacy. (Another problem is that 40 percent of Egyptians married to cousins.) Hessler thinks that the low literacy is because written, formal Arabic is so different than spoken Egyptian. This leads to one of the funniest episodes in the book, a parliamentary election where the ballot has names and symbols, which the candidates pick from a list of government approved ones (that include knives, rifles, and scorpions). One man outside a polling station told him, "I voted for the lamp and the helicopter." [CBS]
• [P]roof-of-work axiomatically requires high transaction costs to ensure payment finality ... Counterfeiters can attack bitcoin via a "double-spending" strategy, ie spending in one block and later undoing this by releasing a forged blockchain in which the transactions are erased. This paper starts by introducing the concept of "economic payment finality" in the blockchain. That is, a payment can be considered final only once it is unprofitable for any potential adversary to undo it with a double-spending attack. ... If the incentives of potential attackers are analysed, it is clear that the cost of economic payment finality is extreme. For example, to achieve economic payment finality within six blocks (one hour), back of the envelope calculations suggest that mining income must mount to 8.3% of the transaction volume – a multiple of transaction fees in today's mainstream payment services. [DSHR]
• Let's compare Nakamoto's goals to the state of cryptocurrencies in practice: *No trusted third parties. In practice you have to trust both exchanges and mining pools. *Irreversible transactions. In practice immutability is a double-edged sword, but in any case the 51% attacks on smaller cryptocurrencies illustrate the reversibility of transactions. *Micro-transactions. In practice the average fee to get your transaction confirmed is more than $1 - as I write it is $4. *Parties transact directly without intermediaries. This is possible, but in practice for large transactions you need exchanges, and for small transactions you would need the Lightning Network (if it worked). *Buyers need not reveal personal information. In practice, except to an exchange. And note that de-pseudonymizing cryptocurrency addresses turns out to be fairly easy in practice. *Irreversibility protects sellers from fraud. In practice, fraud is rampant. *Escrow protects buyers from fraud. In practice, escrow mechanisms have not turned out to "easily be implemented". So Bitcoin hasn't been a great success measured by Nakamoto's goals for it. [DSHR]
• In 2001, a Boeing employee named L. Hart Smith published a paper criticizing the business strategy behind offshoring production, noting that vital engineering tasks were being done in ways that seemed less costly but would end up destroying the company. He was quickly proved right. [Matt Stoller]
• The superficial perspective might be that every internal activity that used to be related to a task that has been out-sourced is no longer necessary. Even that is not true but, worse, it fails to acknowledge all of the new internal tasks that had not previously existed. To add insult to injury, contemporary accounting practices do not allow these unavoidable additional costs to be billed against that particular item of work – because it is no longer identified as an in-house task – so these charges are allocated instead as overhead to any remaining in-house work. This misrepresentation of true costs furthers the illusion that outside production is cheaper than anything done inside, building the pressure to ship even more work offsite, until there isn't any left. The irony of this situation is that it is so easy to understand in the extreme. Suppose that a manufacturer had succeeded in out-sourcing all of the work that it wished to isolate from the preferred task of systems integrator. The unallocatable costs from the huge amount of out-sourced work will now appear as overhead on the few remaining tasks, like sales and product support, confirming that these were now even less profitable than manufacturing had been when the spiral began! "What are all of these additional tasks?", one might well ask. The first is the need to write a specification for the product, which must be more complete and precise than would be needed for in-house production, for which omissions, refinements, and improvements could have been accommodated without the need for costly legal discussions. One must ask the question as to where the skills for writing such specifications will come from if there is no continued in-house production from which to learn. [Hart-Smith]