Talk
and Log: Wilderness Politics in British Columbia.
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Its a common rule and an open secret, that the capitalist free market economy tends towards monopolies. The so called "free competition" eliminates all competitors until only the strongest and largest one remains - or until the whole branch eliminates itself by overcompetition. Propagandists of neoliberalism see the state as the main enemy of the market - not monopolies. With the ongoing globalization they get at the same time rid of regulating governments as of limits to cartells, because the new scale to be measured with is the world, not anymore state, region or the actual place where the company is established and working and exercising its major influence.
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"So the duty its not only to fight the so called misuse of economic power, but to fight economic power itself. Walter Eucken (1891-1950) |
Thesis 1, that competition is not firsthand limited by the state, but by the inherent tendencyof capitalism towards monopolies, has been recognised quite early. Walter Eucken, father of the social market economy, together with Röpke and Rüstow creator ot the Freiburg-School, had the opinion, that a lassez-faire economy would lead to ever increasing concentrations of power. Groups, defending their economic interest control ever larger parts of the markets through cartels, fusions, dumping prices, market barriers and more. The result of this is, that they can blackmail democratic governments (> jobs, taxes ..). Consumer decisions on the markets are replaced by an uncontrollable tangle of economic and statal rule.
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"Al forms of market domination must be a reason of sorrow, all." Mancur Olson, Oekonom und Politikwissenschaftler ( 1932-1998) |
Thesis 2:
Politics of the state
should have the objective, to dissolve economic power groups or to limit their
functions. (Piper, Nikolaus (Hrsg.):
Die grossen Ökonomen. Leben und Werk der
wirtschaftswissenschaftlichen Vordenker. Schäffer-Poeschel,
Stuttgart, 1996.
S 197:)
A very clear statement by the leading figure of the liberals, to which nothing
has to be added.
Thesis 3: While nowadays the idea is quite popular, that monopolies and massiv market powers have to be accepted on national levels, because they guarantee global competitiveness, Euckens arguments were exactly opposite: Gobal competitiveness, if it means a global economy, steered by competition and justice, is obstructed by mighty trusts. (p 199). If in the time of Eucken there was probably still room for discussion, what concerns this thesis , nowadays it has to be taken as granted.
| Definition SUNK COSTS: Expenses that can't be recovered,
based on a decision that caused them and can't be reversed, as e.g. expenses
for PR or product research. Those may pose an entrance barrier to the
market. Market participants have to draw level with their competitors. If
their competitors are to big and too much in advance, such high costs of
market entrance may occur - as sunk costs - that often this risk is enough
to fend of competitors.
nach: Economics
from A to Z: |
Sunk costs, brother of the economy of scale, are the defence line keeping the small from the market and favouring the big ones. The should not be prettified as does Martin Hostettler in his article on sunk costs [Wald und Holz 10/03, S. 51]. That only makes his stand as propangandist of neoliberal ideologies more visible. The article contains 2 logical errors in 3 paragraphs and, dont cry over spillt milk is applicable in relation to milk, but a rather serious matter what concerns longterm investment, as most forests are.
Logical error No 1: The expensive tractor the community uses even as it comes more expensive than hiring one, is declared as acceptable, based on the argument of sunk costs. With this argument Hostettler prolongs one of the most urgent problems in the management of the Swiss forests: Insufficient cooperation of too small unities. It was an error, that each unit bought such an expensive machine. The error happened - and should not serve as forceful argument to stop the urgently needed restructuration. Some other use has to be found for the superfluos machine.
Logical error No 2: A forest expert that plants oaks (or whatever) at the wrong place, is always a bad investment and should be replaced without regards to costs that occurred allready. But - if we look at the argument: The strong competition by other tree species ... the need of intense care ... let the nature develop freely, confirms something, that most forest experts (outside the Association of Swiss Foresters) understood in the meantime, namely, that economists do not understand nothing about forest economy. Most of Switzerlands forests outside the Alps would, without sylvicultural treatment, be covered of dense and shady beech forests, that form the climax. Everything not called beech (well, yes, or spruce) has to be protected from its dominance by intense care. Environmentalist commit the same error over and over, when they demand: Woodcutters out of the forests! - Leave the forests natural. And how much effort and expenses they incur afterwards, to keep the forests open, so that enough light reaches the ground; to protect meadows from trees recovering them, to protect their beloved - sun loving oaks - from being overgrown by beeches?
Especially oak forests need an enduring protection from overshadowing, what concerns their crowns, while needing shadow for their stem, as otherwise it forms side-branches, that devaluate the wood. Sun flooded, open forests with mixed structure, as they are wished by environmentalists, can only be created and maintained by precise harvest of single stems of determined, overrepresented diameters. The ideal forest for environmentalists as for recreation, called Plenterwald (forêt jardiné) would disappear with such a rationalisation and industrialisation of forest management as proposed by those guys.
If one takes Hostettlers arguments serious then they do not mean anything else than: Back to the early 20th century where only profits counted, plant spruce and poplars ... and, for heaven's sake, promote wood energy that we can use those 80% of beechwood we will produce then. [The Swiss forest- and wood industry might be served better, if they would employ an economist that understands at least his own business.]
Sunk costs are decisive, especially for forestry, with its extremely long production periods. A wrong decision on what to plant or how to treat stocks may destroy longterm investment. Efforts to recover sunk costs may not only run the accounts into troubles, but as well the forests themselves, as the following study of FAO shows:
| http://www.fao.org/DOCREP/005/AC805E/ac805e0u.htm The idea of complying with criteria and indicators for achieving SFM is very broad. At the ground level, compliance is often translated into harvesting systems such as improved logging (IL) and reduced impact logging (RIL). The inherent principle is to adopt selective timber harvesting with minimal damage to residual stands and reduced environmental impacts. This can raise timber yields for subsequent harvesting cycles. In terms of biophysical impacts this is sensible. Whether it is financially viable remains unclear. Experiences in various parts of the world seem to provide conflicting evidence in support of RIL in comparison with the “cut and get out” conventional logging (CL) practices. The opportunity cost is computed as potential gross revenue net of the direct cost of extraction. Fixed indirect costs such as forest premium for the logging rights and road construction cost, were not included as they are considered sunk costs. These foregone revenues consist of foregone timber revenue incurred by the concessionaire and loss of royalty charges not collected by the Government. The protected buffers took up about 28 percent of the licensed area. Ironically, payments of forest premium for the logging rights cover the whole licensed area including the buffers. Hence, the concessionaire has an interest to recover a portion of the sunk cost incurred, by extracting timber from the buffer areas. Each harvesting crew will be paid on a piecemeal basis by the contractor depending on the quantity and quality of timber extracted. Likewise, the contractor will also be paid on a piecemeal basis by the concessionaire. The above analysis is one step in evaluating compliance with the MC&I. The next step is to assess the benefits of compliance. Although results suggest additional expenditures being incurred by the stakeholders, there are cost savings to society due to a reduction in off-site environmental impacts. There are expected to be on-site productivity gains as well as from both timber and non-timber forests products that can be reaped during subsequent cutting cycles. Global society too is expected to gain from the higher potential for carbon sequestration and biodiversity conservation. |
Talk
and Log: Wilderness Politics in British Columbia.
Above link leads you to an extensive description of that book and of the development of forestry, the quarrels with environmental protection and further claims of society towards forests. Obviously the old growth forests of BritishColumbia, with their high stocks of wood have been harvested - without any plantation or maintenance costs - while the productivity of afforestations have been largely overestimated. Wilson analyses the conservative effects of sunk costs, here not as immobility of a forest lobby blocked by their traditional and protective attitude towards forestry as in Switzerland, but he critizises politics: By allowing companies to harvest that wood first that was most easy and cheap to get, the former government caused the future problems. Early overinvestment in wood industry do not allow nowadays a change in politics, in spite of the need to dimnish the amounts harvested and to improve the harvesting methods.
Even in the wood paradise of British Columbia more and more sawmills have to close, what forces the government to issue harvest licences ever cheaper. The management of the forests is by no means sustainable. Clear cutting (150'000 ha/year) dominates. Water and water supplies are spoilt, the forest industry makes fun of land use plans, biodiversity remains a dream and the old growth forests disappear. Natural forest management has little chance against the industrial forestry model!
Now, here at last each friend of the forests would have to scream (or utter at least a timid "uff). It is obvious, that this type of forestry that at present determines the wood prices on world markets has to move into the direction of natural (or at least nature-close) forests management, and not the opposite. Why, for heaven's sake, do the foresters society and the forest owner's society give so much space to people, that intend to promote industrial forestry?
Don't cry over spillt milk?
That sunk costs need a bit more brainwork and should not be coppied shows the following example from agriculture: Even in the USA the year 2003 was very dry and drove some farmers into bankruptcy. Cotton and peanuts were in a deplorable shape. Older farmers claimed, that it was the worst year since the 50ies (what is statistically right). Even as theoretical economists as Hostettler would write off the undertaken efforts as sunk costs, not to throw good many after the bad, the real economy looks different:
| sunk costs / acre | do nothing | get the poor harvest |
| lending, work, seeds, fuel, fertilizer, chemicals | 150 $ | 150 $ |
| harvest / income | 0 pound / 0 $ | 500 pound / 200 $ |
| extra expenses for harvesting: dues, chemicals, laboratory, harvest |
0 |
200 |
| total loss per Acre | 150 $ | 100 $ |
The farmer that throws good money after the bad one, succeeds in diminishing his losses for a third.
Sunk costs are a problem for new innovative branches, so much needed by the market for growth, but so much blocked by sunk costs. The International Energy Agency (IEA) analysed that for new technologies as Bioenergy. This is halfways competitive, when mixed with traditional fossile fuels and on a small scale, especially in rural areas and in developping countries. High sunk costs for longterm investment and infrastructure impede the market entrance.
4.5.3. Global Scenarios for Biomass Energy
| The main function of these restrictions is to protect some powerful monopolies.
A socially efficient outcome in the production and distribution of cultural
products can be achieved by market competition and competitive pricing without
the wasteful monopolies generated by current copyright restrictions.
Copyright: Economic and Game Theory. Why Napster is Right. Competition with Sunk Costs |
Very high and often decisive for the development, are sunk costs for electronic hard- and software. The costs for research and development are terrific, the market chances but chances without guarantee. If a product is not accepted from the market, the whole effort was for nothing.
In those markets very high costs are sunk to get market shares. So Netscape distributed its browser for free, but gets so respectable numbers of user and publicity, what makes it possible for them to sell other services. The same holds true for Flash, Google .... and, at a very small scale, for Brainworker.
free software: Problem - Recovery of Sunk Costs
Economic literature on investment behaviour arguments, that it is more rational to wait until more information is available - even if profits, on the paper (!) can clearly be made. This wavering, especiall dominating in recession phases, is enhanced by the risk to sink investments. Little discussed so far is the education market. Only three years ago media and industry made a lot of noise, that the supplies with qualified IT-specialists are highly insufficient and that Europe risks to stay far behind the USA. That looked promising for many students - and nowadays (2003-4), those that started their studies in this time did not even leave university, the IT-specialists join the lines of the unemployed. In the same years many invested their capital directly in this field or in stocks - and sunk their pensions. To argue on sunk costs with the example of a car drive to the wrong kiosk that has the wrong brand of icecream is thoughtless.
What concerns global warming, CO2 and other environmental problems we have the same problem. It is for shure that many expenses in those fields can't be recovered - but the costs of doing nothing might be much higher. Here research should help to minimise the risk of misallocations and failed investments.
Technology Transfer and Climate Change
In Impact of Uncertainty and Sunk Costs on Firm Survival and Industry Dynamics Vivek Ghosal*. School of Economics. Georgia Institute of Technology. Atlanta, GA 30332, USA., September 2002 statistically showed the effects of increasing sunk costs with data from 267 US-Firms over 30 years.
The numbers show without doubt, that the concentration is increasing and smaller firms are expelled. Sunk costs are a small problem for large firms, but a large one for small firms. While before mainly the technological development was held responsible, nowadays it gets clear, that insecurity and sunk costs play a key role. Market structures are heavily determined by sunk costs.
Last not least here a slightly academic text, for bookkeepers and scientists: Sunk Costs and the Measuring of Economies of Scale: Robert D. Cairns*. Department of Economics, McGill University. 855 Sherbrooke St. W. Montreal Canada H3A 2T7. July 25, 2003
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| Die Weisheit der Börse ... |
Martin Herzog, Dipl. Ing. ETH, WEBDESIGN. Rheinfelden, 14 february 2004