Thursday, April 14, 2011

Whats it all worth?

Debit, Investment, return, cost, price, value, fixed, variable, risk, reward, time...

The above articles talk about some of the American problems with valuation of higher education. They echo a sentiment that I have been reading about here. It's not as clear and its not the same, but the pattern is showing up. The problem is the idea of giving people an undergraduate degree and assuming its got some sort of intrinsic value.  (The fact that you end up in debit for it is just a really nasty side issue)

I have just read another article about problems with the Australian VET sector being squeezed by the uncapping of University places.

I think these articles all tap into the same vein of discontent.  The fact that getting a good education is becoming less and less a determining factor for your future health, wealth and stability.  Like any investment, once the risk goes up and the returns go down, the value of the investment starts to look pretty uncertain.

I like the phrase from the first article of an investment bubble in higher education.  My feel is that its already deflating in Australia and the reforms that are busy moving the deckchairs on the titanic are just obscuring the problem.

Before I read these articles the way I was trying to articulate the issue was from the point of view of Universities as generators of wealth.  The problem that I was seeing is that the economy has changed from a manufacturing and agriculture base to a resource and services base.  China and Germany are dominating the manufacturing while the rest of the developed world tries to take the high ground in a Knowledge Economy, all the while that google et. al are making knowledge freely availible to the whole world....  Nothing could go wrong here.

So my thesis was that Universities are the source of "New" knowledge which previously would have fed down into the local and regional area and feed the renewal of industry.  Now we have seen a long depression in the research budgets and the spinoffs of the University sector into Industry, mixed with a fundamental shift in off-shoring anything that can be moved to China.  So the dynamic that previously renewed the industry in Australia has dissipated.  Universities are finding they are irrelevant and have little to offer.  This reinforces the poor value proposition of investing in the research and higher ed sector and the demand for the Universities to generate more graduates with the same or less funding.  This is one of those "Oh Shit...." dynamics.  Otherwise known as the death spiral.

The problem is that it can't be fixed by throwing money at it.  Because every bit of new knowledge generated by an Australian University will be availible to everyone in the world the second its published. So both the initial investment in the research and the flow on effect of commercializing it is being exported at the speed of light via fiber optic cables. 

The free market in knowledge is a great leveler.

Currently the economic powerhouses have the capacity to build on new knowledge. China, India, Brazil and weirdly Germany have the capital and the existing industrial base and the cultures to turn knowledge into practical industry.  Australia on the other hand has an industrial sector that is choking to death and every functional business is putting downward pressure on wages and off-shoring everything that moves.  We have no capacity to grow on.  There is no critical mass... and every time something tries to grow it gets off-shored.

This is not an rant against off-shoring.  The point is that this cycle will happen to any country where the bubbling vat that transforms knowledge into real value is drained.  Australia has had a brain drain, an industry drain, a capital drain and is now living through a period where we have a constant capacity drain.  We have no critical mass in either the knowledge side of the equation or the industry side of the equation.  There are lots of tiny little companies doing amazing things. What we need is a massive number of companies doing normal boring stuff.  This is the fertile ground in which people are trained and get ideas, its the soft landing area when companies and people make mistakes and try innovative ideas. Its the fertile ground in which the seeds of new knowledge can be planted, and just be sheer quantity, find someone who has the interest and opportunity to give them a go.  In the best case scenario, a new idea finds a number of niches that it can be tested in. Some work, some fail, and finally one takes off.
We, to extend the metaphor, have a sparsely populated, hostile environment where there is little risk taking behavior and so very few ideas can be tried, fewer get created and we reach stagnation.  No University research and no Industry.  Welcome to Australia 2011.

The problem is that like any good sinking ship story, the more the rats see other rats jumping off, the more they jump off creating a chain reaction that, funnily enough, this pattern reflects the market dynamics that happened at the time of the GFC. It's essentially a crisis of confidence that ended the bubble ( as all good bubbles do) and the value collapsed back down until everything devalued to the point where the difference between perceived value and "fundamentals" was bleedingly obvious to the consumers and they started to consume again.  Then the back swing begins.... pendulum whatever...

The converse view is the "Counter-Cyclical" idea. Run in the opposite direction to the herd, buy when the market is down, sell when its up... and so we come full circle to the first article at the top of the page. The featured guy making the dire predictions ( or stating the obvious if you have a brain) has made his fortune playing the counter-cyclical game.

So what in the end do we have.  Cycles that are caused by too many people being on the cycle and not enough being "counter" or playing the opposing strategy.

If you apply this thinking to economics, its basically means that too many people are holding the same opinions in the market about value at the same time. Ditto with education, ditto with housing etc.  Its not just that people make stupid value judgements... that's normal... its just that too many other people are making the same value judgements using the same strategy at the same time.

This problem is magnified when you have the effect of collective bargaining in the market place.  Lots of people get together and all bet in the same direction, often by proxy.  Think "investment manager" or automated fund trading.  This allows thousands or millions of people to bet exactly the same, at the same time and cannot help but cause a tiny bubble.  When lots of these systems agree, or worse, feed off each others agreement and play follow the leader we have a massive rush of passengers(Lemmings) to one side of the ship.  The market gets distorted and the media picks up on the trend .... and magnifies it by only reporting on one side of the story.  So everyone who watches the same news at the same time... gets the same herd reaction and tries to run in the same direction.... and so more passengers run to the already crowded side of the ship.... ta dah! We have a problem.

Markets are regulated primarily by chaos. Chaos causes an roughly even distribution across all positions and all possible strategies. Effectively everyone running in their own direction, at their own pace and following whatever strategy they like.  The problems happen when order starts to form within the chaos.  (This is the sort of thing professional gamblers love, because they can use order to make money) Markets are eventually destroyed by emergent order.  The more order, patterns and structures appear in the market, the more trends there are to predict the market, the less distribution there is.  Value starts to pile up within the patterns.  But value is not a real thing... its the "difference" between "having" and not "having" something. So differences appear all along the edges of the patterns.  Then as the patterns move to the new edges, the morph, like a cheap edge detection image filter applied repeatedly.  The emergent nature of the patterns would be fine in an abstract numerical space but we are dealing with units and materials that have inherent form. There are regulations and quantity limits in the market place that cause interference in the movement of the patterns through the space. These cause weird pileups and slack areas where value either cannot exist ( due to a flattening effect) or constant value ( a money drain or money tree) Its within this environment of reefs and pools that the chaos should exist. But due to the ordering effect of people playing follow the leader we get bubbles forming. 

There is no point trying to manipulate the regulations in the market. All this does is change the environment in which the action happens.  We need to reduce the factors that facilitate mass migrations of people to the same or similar strategies.  Cause the big secret that no one wants to admit is that a market is a closed game and for some people to be winning, someone has to be loosing.  It's simply differences between "having" and "not having". Value (i.e money) is a perception game.

End rant.

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