Category Archives: Microeconomics

Micro posts and comments

Why Is Blockchain Not Hotter? Supply Chain Brief commentary

Lora Cecere, the Supply Chain Shaman, makes some interesting points in this article on blockchain adoption. I’m going to comment a bit below after you look at Lora’s brief note:


   I was sitting with a representative from the United Nations on my way back from Colombia. As we took off from Bogota, we discussed the potential of blockchain to help her with feeding children in the highlands of the Colombian-Venezuelan border.

Source: Top Supply Chain Brief Supply Chain Transportation Content for August, 2017

Lora is certainly right about the complexity compared to conventional business systems, and the obscurity of the data structure. For all their issues in the early days, relational databases were essentially rather a transparent structure. And they succeeded where networked and linked databases, more complex structures, did not. It wasn’t till Excel became commonplace that people really ‘got’ the table structure of relational databases. As Lora indicates, there is certainly not organizational readiness– certainly not enough professionals trained to understand and communicate what’s going on in the system to ordinary folk– the famous ‘business translators’ McKinsey, the consulting group, says are in such short supply.

And she’s right about the security issue. While blockchain is touted as more secure, the recent history of the bitcoin movement detailed here ( indicates that frequent issues have arisen, are still not settled, and are still emerging.

Her last issue, more sticks than carrots, I found interesting. But this is typical of the economics of very competitive industries. At the limit of perfect competition there is no profit; all the extra gains, or ‘rents’ as economists call them, go to the providers of inputs. In the case of blockchain, that will be the miners.

Another point not mentioned by Lora is the fact that blockchain systems rely on economic incentives to work.  Unlike ERP, for instance, in blockchain there must be compensation for the work of processing each transaction. That might be considered a strength– you can’t escape transaction costs or hide them– but it’s also a weakness, as detailed in the excellent blockgeeks writeup above.  Every aspect of blockchain involves incentives, and if they are not at the right level, for all the participants, the system fails to function well. It may in fact blow up, and no one has responsibility. Humpty-Dumpty cannot be put back together.

Finally the economics at root has to relate to the actual money that users spend and get. In blockchain, of course, the transactions are ‘monetized’ in terms of a ‘cryptocurrency’ such as bitcoin or the ethereum currency– it’s embedded in the system. While these are a very small part of a company’s exposure, it doesn’t matter much how the currency is translated into real dollars or euros. But when it becomes big, the accountants and SEC are going to start asking how much real money is this.  Now the value of bitcoin over time has been much publicized– we’ve all heard of ‘bitcoin millionaires’, who bought a small amount of bitcoins only to see them jump in value many times.  But recently bitcoin has been a very volatile currency, changing value relative to dollars for instance by very large percentages in a very short time. this could make for massive fluctuation on the books of large trading companies who are using a blockchain system for managing say ocean logistics or freight contracts as their only business; say a freight forwarder. Someone is going to force them to declare how much in their book currency all this is worth. That will require massive adjustments as the conversion rate of the cryptocurrency, which is very thinly traded, with respect to say the dollar changes.

As evidence that some are concerned, we only need to look at the fact that the Chinese government has banned ICO’s (initial coin offerings) of cryptocurrencies by Chinese companies. They see the problem, and they are determined to prevent it obscuring or diluting value.

Some box terminals are facing ‘catastrophic economic failure’, warns analyst – The Loadstar

What’s the truth? Some experts say that terminals must be able to handle giant ships and therefore few customers, or fail.  Olaf Merk (of the OECD) says it looks like a ‘monopsony’; a port has only one or very few customers. Actually according to Alan Manning [1], who ‘wrote the book’ on monopsony, a monopsony simply means that there is little elasticity of supply (of incoming containers i.e. ships) for the port.

The classic monopsony situation occurs in labor supply; the ‘company town’. It used to be seen in mining and very early, in manufacturing.  In a company town, if you want to work, you have to work for the one employer.  The firm must raise wages for all employees if it needs more than are available at the town. If it needs fewer employees, it can drop wages.  Manning’s book defines labor monopsony as any case in which the labor supply (of workers) is inelastic (relatively vertical supply curve) while labor demand by the employer is elastic (downward sloping demand for labor).

What makes for inelastic labor supply? In the company town it happens because workers feel they don’t have mobility flexibility– it’s too far to the next place to work. But monopsony can happen for lots of reasons– discrimination, for one, can limit workers’ ability to get a different job.  In fact, any condition that prevents workers from seeking other work, and thereby constricting individuals’ market for jobs, suffices. Examples include safety on the job, or most recently in the news, forcing truck drivers to lease their trucks through a drayage firm.  The huge lease obligations pin the drivers to the job, and they lose control of work conditions and in the case of trucking, pay scales as well, since the drayage work in US ports is often piece work rather than (often unionized) pay by the hour.

In the port example the port is the labor supply– if the port is forced to upgrade to support ULCC ships in the 17-20KTEU range, it will be captive to those carriers that wish to run those big  ships to it. These consume so much port capacity that the port will not be able to solicit other jobs from smaller ships.  If it does, congestion will result.  The very few carriers calling there with their ULCCs will demand lower prices to land, and the port ‘wage’ will decline. That naturally also affects their profitability.

And the ports that don’t adapt to the large ships will not be able to get work at all, or nowhere near as much. It’s like the people living too far from the company town (on the remote farms) who will fall out of the labor market for that firm.

Such fun employing economic analysis to ports.

Source: Some box terminals are facing ‘catastrophic economic failure’, warns analyst – The Loadstar

[1] Alan Manning (2003) Monopsony in Motion


Lost Generation in advanced biofuels at scale

This article offers an interesting perspective and economic analysis of why ethanol fuel has not taken off despite lots of price supports.  Essentially a lot of people bet wrong about what would happen with oil.  There is a proposal for how to help the situation based on an report from the ICCT.  california-contracts-for-difference_white-paper_icct_102016

screenshot-www-biofuelsdigest-com-2016-10-19-08-28-02Source: Lost Generation: ICCT’s financing scheme to jump start advanced biofuels at scale : Biofuels Digest