Ten interesting things we read this week

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At Ambit, we spend a lot of time reading articles that cover a wide gamut of topics, including investment analysis, psychology, science, technology, philosophy, etc. We have been sharing our favourite reads with clients under our weekly ‘Ten Interesting Things’ product. Some of the most interesting topics covered in this week’s iteration are related to ‘the colocation scandal at NSE’, ‘behavioral solutions to alcoholism’ and ‘waste of resources during wars’.

Here are the ten most interesting pieces that we read this week, ended July 20, 2018.

1) Ajay Shah: Cambridge Analytica-style mastermind of financial markets [Source: Sunday Guardian]  
The article throws light on a Cambridge Analytica-style scam where Ajay Shah is alleged to have lobbied for NSE, using his clout in the Finance Ministry. The recent FIR by the Central Bureau of Investigation (CBI) on Ajay Shah has confirmed murmurs that were doing the rounds of exchange circles about the involvement of insiders in the colocation scandal. The CBI probe and the resulting raid laid bare the claim of India’s largest exchange, National Stock Exchange (NSE) of being the provider of a transparent and unbiased trading platform, and brought to the fore the murky dealings of a coterie.

Among names of alleged insiders is that of Ajay Shah, who continues to be employed with National Institute of Public Finance and Policy (NIPFP) as faculty. The CBI’s probe revealed that Ajay Shah collected NSE trade data in 2005-06 under the garb of doing research, while he was employed with Centre for Monitoring Indian Economy (CMIE). He was seen by the probe as being instrumental in the exploitation of the NSE TBT (Tick-By-Tick) architecture. In this architecture, data was disseminated in a sequential manner, whereby a stock broker who connected first to the server of the stock exchange received a “tick”, i.e. market feed, before the stock broker who connected later. This gave undue advantage to entities that were able to connect to the exchange server earlier than others.
 
As CBI details, Ajay Shah helped develop the algorithm software for OPG Securities, having a brilliant insight on the NSE server and its algorithms. CBI has alleged that 90% of the time, OPG Securities was first to access the NSE servers and thereby gained unfair advantage over other entities, thus making undue profits from their consequent trades. CBI has found that Sanjay Gupta, the owner and promoter of OPG Security Pvt Ltd used the server architecture of NSE with the help of Ajay Shah and may have shared part of the proceeds. Ajay Shah may have designed such algo software for some other firms as well, with profit sharing agreements such as Alpha Group FPI (Singapore) and Omnesys. Shah, along with his wife Susan Thomas developed NIFTY50, which is the most successful product of NSE. However, in an unprecedented gesture, the NSE has been giving Ajay Shah and Thomas a hefty annual royalty as a certain percentage of the income generated of Nifty trading. It may be noted that Nifty contributes nearly 80% of the turnover of NSE. This was while the couple is doubling as faculty with government institutions. Susan is a professor in Indira Gandhi Institute of Development Research (IGIDR). This information was, however, withheld from the public when the NSE filed its red herring prospectus for the now “on-hold” IPO.

Ajay Shah, who is a professor with NIPFP, is alleged to have lobbied for NSE, using his clout in the Finance Ministry and also “influenced” FIIs and PNote activities on NSE.  Also, a complaint alleges that the base technology at the broker’s end is OPG Securities and the management of data centre was being done by Omnesys Technologies, in which NSE is holding 26% stake, while Chitra Ramakrishna was sitting on the board of Omnesys Technologies despite the parent of Omnesys being a broker of NSE. This is awaiting further investigation. It is now understood that OPG Securities alone had traded worth over Rs6,000 crore on NSE using colocation facility.

Despite such charges against Ajay Shah by the CBI in the over Rs50,000 crore colocation scandal, he continues to hold post of professor with NIPFP, which is an autonomous research institution in the Ministry of Finance. A thorough probe may reveal that this scandal is no smaller than that of the Cambridge Analytica scam, in which the international data mining company exported confidential data.

2) Asia’s shared-bike sector faces growth headwinds [Source: Financial Times] 
Asia’s shared bicycle sector is undergoing a pronounced contraction that has edged out smaller players and slowed down rapid overseas expansion by some of its biggest platforms. Alibaba-backed start-up ofo announced it would close its six-month-old operations in India, as well as in its two Australian sites, Sydney and Adelaide, within two months. The news comes as the company plans to scale back its operations in four regions — Japan, South Korea, Singapore and Hong Kong — because of a cash crunch. The retreat is an abrupt reversal from its initial plans to place 20m bikes in 20 countries by the end of 2017. “Our focus now is on our priority markets and moving towards profitability,” ofo said in a company statement.

Over the past two years, the Asia-Pacific sharing bike sector has enjoyed an influx of investment, allowing as many as 60 platforms to build up bike fleets and subsidise rides in an effort to outbid competitors. The explosion in shared bikes has been most apparent in China, where at their zenith, rows of colourful machines jostled for limited footpath space. However, their ranks have been trimmed in recent months by a number of closures, as smaller start-ups find their financial resources quickly drained by heated competition and bike thefts.

Hong Kong-based start-up GoBee went bust earlier this month, citing financial losses. A European expansion flopped after 60 per cent of its bike fleet was damaged or stolen within the first four months of the service’s launch. Surviving platforms have persisted by seeking backing from China’s biggest tech giants. In April, ofo’s main competitor, Mobike, was fully acquired by food services giant Meituan Dianping in a $3.7bn deal including debt. Using some of the funds raised, Mobike then waived $150m in user deposits on its bikes in an effort to gain an edge over its competitors.

Mobike says it aims to make zero deposits a standard in the bike-sharing industry — a move that would effectively raise the cost of competitors' operations, thus edging other players out.  The boom and bust cycle shares parallels with the spending war between Chinese ride-hailing giant Didi and Uber, which battled for market share by offering subsidised rides to users.

3) Finding behavioral solutions for alcoholism [Source: Livemint] 
Alcoholism and its effects are well-known. Globally, alcohol causes 3.3 million deaths a year. It has been found that alcohol has a causal relationship with 200 diseases, including tuberculosis, pneumonia and HIV/AIDS. Additionally, if we include alcohol-induced road accidents, domestic violence, divorces and productivity loss, the burden of alcoholism on any society becomes prohibitive. Historically, the most-used strategy to counter alcoholism was prohibition. Many governments’ attempts to enforce prohibition failed miserably. Evidence from across the globe shows that prohibition will only drive the problem underground, leading to bootlegging, illegal activities and corruption. Heavy drinkers will continue to get their daily quota of liquor from illegal sources. All the organised religions, for thousands of years, have tried to make sure that their believers do not slip into alcoholism.  Some of those religions even consider alcohol consumption to be a sin.

Awareness about the ill effects of alcohol has been propagated from road signage to labels on liquor bottles. But despite these efforts, alcohol consumption continues unabated. Why? One of the major reasons why past efforts to wean drinkers away from alcohol have failed is because most of those campaigns focused on the ill effects on the health of the individual drinker. From the point of view of new behavioral sciences, this strategy has some fundamental flaws. The permanent health consequences of alcoholism happen far in the future, whereas the pleasure of drinking occurs in the present. It is very easy for the human brain to discount future risk, more so when the present benefits are strong. The human brain’s reward systems are fully active by puberty. With the anticipation of a drink, just being in the physical proximity of alcohol is enough to activate these reward systems. They go into overdrive when there is even a hint of receiving pleasure hormones.

Alcohol consumption itself increases dopamine in the reward system, which creates the feeling of pleasure. It is the cerebral cortex that is expected to control the urges of the reward systems. The cortical areas of a human brain mature only by the age of 24. The brain of an adolescent has not matured enough to control the urges of its reward systems. Allowing adolescents, whose cortical areas are not fully mature, to consume alcohol is like allowing a teenager to drive a car without a brake. Even with the first drink, one of the first parts of the brain to get affected is the cerebral cortex, its inhibitory system. So with each drink, the ability of the cortical areas to exert control over the reward systems become weaker and weaker. No wonder many a drinker who started drinking with the intention to just have one drink ends up having many more drinks than was originally intended. Expecting the individual drinker to control and mange his drinking habit is very much like asking the fox to take care of the hen.

Anti-alcohol campaigners have a lot to learn from the success of anti-smoking campaigns. The impact of these campaigns was minimal when the focus was on the individual smoker and the ill-effects on his health. They showed a significant increase in effectiveness when the focus changed from the ill-effects of smoking on the smoker to the effects of smoking on the non-smoker. The campaigns found their sweet spot of effectiveness when smoking changed from an individual problem to a social evil. Alcohol abuse too should be made into a social evil. Similar to smoking being banned in public places, anyone who has consumed any alcohol at all should be banned from driving any vehicle. This decision sends an unambiguous signal to everyone that alcohol and driving do not go together. “I drink to get high”, “I am normal even after heavy drinking”, and the like are mental models drinkers employ regarding their behavior. To effectively mitigate alcoholism, we need to demolish these mental models. The signs of getting drunk—binge drinking, the stumbling walk, the slurred speech—should be viewed from a zero-tolerance perspective as far as social reaction goes. Campaigns should be created to make these acts the signs of an uncivilized person.

Studies have shown that one of the best deterrents to alcohol consumption is playing up the emotion of shame that is associated with it. Drinkers who lose self-control after drinking should be reminded of how they are making themselves look like fools in front of their colleagues, and children. This informal deterrence strategy based on embarrassment has been found to be more effective than formal ban strategies in reducing alcohol related problems in many cases. Countries in southern Europe like France and Italy have less alcohol-related crimes as compared to England and Ireland. Studies show that this could be related to the fact that drinkers in the former countries have the habit of consuming food along with their drinks. So creating new rituals around drinking alcohol that involve having food alongside the alcohol or having multiple glasses of water in between drinks could also help tone down the effects of alcohol. We have relied on traditional solutions to address alcoholism for far too long. It is high time we employ the learning from new behavioral sciences to chart a new path to more effective solutions.

4) GE’s decline is a warning to Corporate India [Source: Livemint]
At the end of each year, The Economist releases its report on how the next 12 months will pan out for various aspects of global business and society. It is a useful, if conservative crystal gazing exercise, involving anticipating developments in areas like the next wave in cybercrime and religion but also the future of the circus. If, however, you are looking for a wider view of the future of business, the narrative to track is that of General Electric Co. (GE), the 126-year-old company founded by Thomas Edison, among others. In its many successes and its recent failures, the company has become an apt metaphor for the changing dynamics of business pointing to an emerging world which is no respecter of age or pedigree or size, where an entire industry can be upended by a rank newcomer with a single powerful idea and vitally where past success is no insurance against future setbacks. Significantly, GE’s relative decline coincides with the burgeoning fortunes of an upstart like Amazon.com Inc. which is threatening to be the world’s first company to scale a trillion dollars in market cap.

The fall of the once-mighty conglomerate from the hallowed ranks of the Dow Jones Industrial Average comes as no surprise. The giant conglomerate, the oldest company in the Dow, has faced major setbacks over the last few years and has been losing value at an alarming rate. Its market cap has fallen over 50% in the last 18 months. What has been surprising is how muted the reaction to its decline has been. For years, the company was a potent symbol of American industrial might, spanning as it did businesses as diverse as aircraft engines and medical devices. Above all, it was also a bellwether for dynamic new ideas in building businesses. The company got most things right including stability at the top; both Jack Welch and his successor Jeffrey Robert Immelt had long runs as leaders. It was flexible, had robust processes and had quality standards that became benchmarks for the industries it was in.

Just how far ahead the company thought, is evidenced from its entry into the nascent Indian market in the 1980s. There is the now oft-repeated tale of how Jack Welch, the company’s legendary chairman, outlined the potential of the Indian market and GE’s plans for it on a table napkin at a luncheon with top editors in the late 1980s. GE was also one of the pioneers of business process outsourcing to India setting up Genpact in 1997. Of course GE made mistakes. It never came to terms with its ambitious media acquisitions and the $9.5 billion purchase of French transportation company Alstom’s power business in 2015 didn’t quite work out. Above all there was the Welch-led drive into financial services which at one point dominated the company’s profit numbers. But when the financial crisis hit in 2008, that business proved to be a millstone around its neck.

Even in India, despite an early and promising start, it floundered with investments such as the one in Dabhol and ironically its joint venture with the Godrej group for consumer appliances. But the vast devastation in its valuation has less to do with its own actions, including those that were misguided, and more by the changes in the environment itself. GE may still stoop to conquer. It has the chops to dig itself out of this hole. Under its new chief executive officer John Flannery, an old India hand, the company has announced plans to focus on the aviation, power, and renewable energy businesses while spinning off its healthcare unit as a stand-alone business and selling off its stake in its oil services company Baker Hughes while retaining its wind turbines manufacturing unit. But the lessons of GE’s fall from grace shouldn’t be lost on the vast lumbering giants of corporate India, smug in their size and relative monopolies protected by regulation and political patronage. It can all change in one millennial moment of creative destruction.

5) The cold war revival will be very expensive [Source: Financial Times] 
After a post-cold war decline and the squeeze that followed the 2008 crisis, this is a bountiful moment for defence contractors. Not only has Donald Trump raised the US defence budget but he spent last week berating its allies for missing Nato’s spending targets. But according to John Gapper, the author, nothing eats money like a weapons programme and being told to spend more money quickly on defence is a recipe for waste. Europeans and Americans need to be better shielded from the resurgent military threats of Russia, China and others, but it will not come cheap. It will be particularly inefficient in the fragmented and nationally divided European market.

Weapons are inherently expensive, lacking the qualities that help to reduce costs. Like a Formula One car, not only is the product itself bespoke, but it is made up of many unique parts, few of which can be bought off the shelf. The whole point is to have a piece of advanced equipment, on the cutting edge of technology. BAE recently showed a model of its Tempest fighter at the Farnborough Air Show because none of it has yet been developed — not the avionics and sensors, nor the missiles, nor the engines that Rolls-Royce will design if BAE and the Royal Air Force find partners beyond Leonardo, the Italian defence company, and the weapons manufacturer MBDA. The entire aircraft is a prodigious feat of imagination. Nor can these costs be covered by making a lot of the product. Apple compensates for stuffing high technology components such as facial recognition sensors into iPhones by selling millions, but production runs for weapons are tiny. The F-35 was designed for use by Nato allies, but they cost about $90m each, 310 have been delivered, and the target is only 3,000 aircraft.

There is also a supply chain constraint. The Pentagon cannot save money by having components acquired globally and weapons assembled in China — it is already wondering whether its supply chains are secure enough. Not only do defence contractors carefully pick and certify suppliers, but they often specify the individual factories that will make each widget. These challenges are big enough for the US, which will spend an estimated $623bn of Nato’s total of $936bn on defence this year. They are even greater for Europe, as despite some consolidation, Europe suffers from fragmentation and lack of economies of scale that the EU has taken only baby steps to address. McKinsey, the consultancy, estimated last year that European countries could make savings of 30 per cent by procuring jointly and making weapons platforms operate together. Currently, not only is procurement done nationally but software and systems are often incompatible.

Governments would dearly like to prevent themselves being locked into expensive and inflexible weapons systems that often operate long after they were to be replaced because of the cost of building new ones. They dream of fighter aircraft that are upgradeable in the manner of iPhones, rather than having obsolete technology flying around 30 years after launch. The Pentagon now talks of “creative compliance” — speeding up innovation by giving contractors incentives to innovate rapidly rather than being hamstrung by bureaucracy. If the RAF finds the partners to build Tempest, it wants the aircraft to be reconfigurable and to have open architecture, rather than being stuck with software that is ageing before the first test flight. While it all sounds highly rational but history hangs heavily over defence procurement and President Trump’s effort to propel allies into ramping up budgets rapidly will make it heavier. His metric of success is spending money rather than spending it efficiently, and Europe has not performed well at either.

6) The CEO of Levi Strauss on leading an iconic brand back to growth [Source: HBR] 
In this piece, Chip Bergh, the CEO of Levi Strauss explains how he took the challenge to turnaround the fortunes of the company. Having spent 28 years at Procter & Gamble, Chip was surprised when he got the opportunity to run an iconic brand like Levi’s. While he thought Levi Strauss had revenue of about $10 billion, he was shocked to know the reality; its sales had peaked at $7 billion in 1997 and then fallen to $4.1 billion in five years. From 2001 to 2010 they never exceeded $4.5 billion. When he arrived, in September 2011, he basically went on a listening tour, spending an hour with each of the company’s top 60 executives. He had e-mailed them questions beforehand, “What are three things we should not change? What are three things we absolutely must change? What’s one thing you’re hoping I’ll do? What’s one thing you’re afraid I may do?” After about 15 or 20 of those meetings, Chip had a pretty clear sense of the problems. When he asked people what they were working on, and how that work linked to Levi’s strategy, he got a lot of blank stares. It was obvious that they were rowing in different directions.

At an employee town hall meeting, when Chip asked, “How many of you think this company is performing well?” he was shocked at the response. Three-quarters of the attendees raised a hand. When Chip arrived, he had 11 direct reports. Within 18 months nine of them were gone, and only one of the other two is still there today. Today he proudly claims that they now have a world-class executive team that he would put up against that of any other company in the world. He also studied the market and customers. During his second month in the job, he visited Bangalore and asked the people there to set up an in-home visit. An in-home typically starts with broad questions about lifestyle and interests and then narrows down to how the customer uses the product and views the category. P&G relies heavily on in-homes, so he had been doing them for years. He finds them incredibly useful, even though the insights gained are qualitative. During this home visit, Chip got his tagline for the brand - “Live in Levi’s”.

Then he developed a four-part strategy: 1) building the core portfolio, 2) expanding market share, 3) becoming a leading omnichannel retailer, and 4) achieving operational excellence. The company also opened an “Eureka Innovation Lab”. It’s essentially a pilot plant, with a laundry operation, cut and sew capabilities, hundreds of rolls of denim, and dozens of creative people. Since the lab opened, in 2013, its biggest success has been revamped women’s denim line, which was launched in 2015. The women’s business had been in decline, owing partly to the rise of athleisure wear. They then began creating denim with new technologies, such as four-way stretch—fabric that recovers quickly and doesn’t get baggy at the knees (a common problem with stretch jeans). Consumers loved the stretch, the comfort, the soft fabric, and the way they looked in the new designs. Since that relaunch the women’s business experienced 11 quarters of consistent growth, and sales increased from less than $800 million to more than $1 billion annually.

While Chip has learnt a lot at Levi’s, the company is also making good progress. They have delivered almost five straight years of top- and bottom-line growth and have more than doubled the value of the enterprise. They have significantly strengthened their balance sheet, paying down about $1 billion in debt. The balance sheet is now an asset (not a liability), with $1.2 billion of liquidity. And they have also dramatically increased their investment in advertising, which is working. Fiscal 2017 was the strongest year the company has had in more than a decade, generating an 8% revenue increase, while the Levi’s brand grew 9%. Chip believes that they can grow beyond the historical peak of $7 billion and someday be a $10 billion brand, as he once assumed the company was. Levi’s lost a generation of consumers in the early 2000s, but today the customers are younger than ever—and they are gaining momentum as they bring them back.

7) IceCube finds evidence of the first Neutrino source [Source: Ice Cube] 
An international collaboration of scientists, including a team from the Niels Bohr Institute in Copenhagen, has found the first evidence of a source of high-energy cosmic neutrinos — ghostly subatomic particles that can travel unhindered for billions of light years from the most extreme environments in the universe to Earth. Since they were first detected over a hundred years ago, cosmic rays — highly energetic particles that continuously rain down on Earth from space — have posed an enduring mystery: Where do they come from? How are they accelerated to energies comparable to that of a penalty kick in football, but concentrated in a single sub-atomic particle? Because cosmic rays are charged particles, their paths are bent in the magnetic fields that fill space, bending their trajectories so that they do not point back to their source. The powerful cosmic accelerators that produce these cosmic rays will also produce neutrinos: uncharged particles, unaffected by even the most intense magnetic field. Because they rarely interact with matter and have almost no mass — earning them their sobriquet “ghost particle”— neutrinos travel undisturbed from their accelerators, giving scientists an almost direct pointer back to their source.

Two papers published on July 13, 2018 in the journal Science have, for the first time, provided detailed evidence for a known blazar as a source of high-energy neutrinos detected by the IceCube observatory. This blazar, designated by astronomers as TXS 0506+056, was first singled out following a neutrino alert sent by IceCube on 22 September 2017. Blazars are a type active galactic nuclei, a class of giant elliptical galaxies with a supermassive, rapidly spinning black hole at its core shooting out twin jets of light and elementary particles in opposite directions. Blazars have one of these jets points directly at the Earth. This blazar is situated in the night sky just off the left shoulder of the constellation Orion and is about 4 billion light years distant from Earth.

Equipped with a nearly real-time alert system — triggered when a very high-energy neutrino collides with an atomic nucleus in the polar ice in or near the IceCube detector — the observatory broadcast coordinates of the 22/9/17 neutrino alert to telescopes worldwide for follow-up observations. Two gamma-ray observatories — the Fermi space telescope and the MAGIC telescope in the Canary Islands — detected a flare of high-energy gamma rays associated with TXS 0506+056, a convergence of observations that convincingly implicated the blazar as the most likely source. These observations show that TXS 0506+056 is one of the most luminous sources in the known Universe, and thus add support to a multi-messenger observation of a cosmic engine powerful enough to accelerate high-energy cosmic rays and produce the associated neutrinos. Only one of these neutrinos, out of many millions that sailed through Antarctica’s ice, was detected by IceCube on 22 September 2017.

Austrian physicist Victor Hess showed in 1912 that the ionizing particles scientists were detecting in the atmosphere were coming from space. Cosmic rays are the highest energy particles ever observed, with energies going up to a hundred million times the energies achievable at the Large Hadron Collider at CERN in Geneva, the most powerful human-made particle accelerator. These extremely high energy cosmic rays can only be created outside our galaxy and their sources have remained a mystery until now. Scientists had speculated that the most violent objects in the cosmos, like the remnants of exploding stars (supernovae), colliding galaxies, and the energetic black holes in the cores of galaxies (active galactic nuclei) such as blazars, could be the sources. As the latest astrophysical messenger to enter the game, neutrinos bring crucial new information to uncovering the inner workings of these cosmic ray accelerators. In particular, measurements of neutrinos can reveal the mechanisms for acceleration of the proton beam in the densest environments from which even high-energy gamma rays may not escape.

8) How the deadly sin of greed was rehabilitated as self-interest [Source: evonomics.com] 
In the aftermath of the stock market crash of 1987, the New York Times headlined an editorial “Ban Greed? No: Harness It,” It continued: “Perhaps the most important idea here is the need to distinguish between motive and consequence. Derivative securities attract the greedy the way raw meat attracts piranhas. But so what? Private greed can lead to public good. The sensible goal for securities regulation is to channel selfish behavior, not thwart it.” The Times, surely unwittingly, was channeling the 18th century philosopher  David Hume:  “Political writers have established it as a maxim, that in contriving any system of government . . . every man ought to be supposed to be a knave and to have no other end, in all his actions, than his private interest. By this interest we must govern him, and, by means of it, make him, notwithstanding his insatiable avarice and ambition, cooperate to public good.”

The idea that base motives could be harnessed for the public good is what the author terms economic alchemy. And in Hume’s time it was definitely a new way of thinking about how society could be governed. During the Middle Ages, avarice had been considered to be among the most mortal of the seven deadly sins, a view that became more widespread with the expansion of commercial activity after the twelfth century. So it is surprising that self-interest would eventually be accepted a respectable motive, and even more surprising that this change owed little to the rise of economics, at least at first. How this came about is a remarkable story, one that is finally running its course in light of mounting evidence not only that people are not really all that knavish, but also that  treating citizens as if they were knaves may lead them to act is if they really were knaves!

It all began in the sixteenth century with Niccolò Machiavelli. “Anyone who would found a republic and order its laws” he wrote in his Discourses, “must assume that all men are wicked [and] . . . never act well except through necessity . . . It is said that hunger and poverty make them industrious, laws make them good.”  Hume, it seems was channeling Machiavelli! It was the shadow of war and disorder that made self-interest an acceptable basis of good government. During the seventeenth century, wars accounted for a larger share of European mortality than in any century for which we have records, including what Raymond Aron called “the century of total war,” which happily is now finished. Writing after a decade of warfare between English parliamentarians and royalists, Hobbes (in 1651) sought to determine “the Passions that encline men to Peace” and found them in “Fear of Death; Desire of such things as are necessary to commodious living; and a Hope by their Industry to obtain them.” Knaves might be preferable to saints or at least likely to be more harmless.

The year before Adam Smith wrote in his Wealth of Nations (1776) about  how the self-interest of the butcher, the brewer, and the baker would put our dinner on the table,  James Boswell’s Dr. Johnson gave  Homo economicus  a different endorsement: “There are few ways in which a man can be more innocently employed than in getting money.” Adam Smith showed how a constitution for knaves might actually work at least as far as the economy is concerned. The economic actor, he wrote “intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” This is hardly making the case for laissez faire that later generations have attributed to Smith. But it is a milestone in the emerging view that motives other than self-interest could be pernicious. The sentence following one of Smith’s rare references to the invisible hand makes this point:  “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

As the housing bubble burst in 2008 and the financial crisis unfolded, many U.S. homeowners found that their property was worth less than their mortgage obligation to the bank. Some of these “underwater owners” did the math and strategically defaulted on their loans, giving the bank the keys and walking away. Unlike the New York Times editorial from two decades earlier, the executive vice president of Freddie Mac, the Federal Home Loan Mortgage Corporation, made a distinctly Aristotelian plea for moral behavior in the economy: “While a personal financial strategy might argue for a strategic default, entire communities and future home buyers can be harmed as a result. And that is why our broader social and policy interests will be best served by discouraging strategic defaults.” Rather than trusting that the market, by getting the prices right, would induce people to internalize the effects of their actions on others, Freddie Mac urged “borrowers considering a strategic default [to] recognize the damaging impact their actions can have on others.”

The greatest challenges now facing the world—including controlling the spread of epidemics and managing climate change and governing the knowledge-based economy–arise from global social interactions that cannot adequately be governed by channeling entirely self-interested citizens to do the right thing by means of incentives and sanctions, whether provided by private contract or by  government fiat. With economic inequality increasing in the world’s major economies helped along in many cases by flagrant abuse of legal and moral standards, one may also now doubt Dr. Johnson’s reassurance that “there are few ways in which a man can be more innocently employed than in getting money.” The novel 18th century idea that economic self-interest might under the right institutions sometimes be mobilized for social purposes remains essential to tackling these problems. Markets remain an essential and vast arena of human cooperation (albeit unintended). But the idea of an economy of avaricious knaves waiting to be harnessed for the public good by a discredited economic alchemy now appears to be anything but harmless.

9) Airbnb loses fight in New York over host data [Source: Financial Times] 
Airbnb lost a high-profile battle in New York on Wednesday, when the city’s housing committee decided the company must hand over information about hosts who use its site to a city enforcement agency. The committee vote, which was expected to be followed by adoption of the bill by the full council, unleashes a crackdown on what critics claim has been widespread use of Airbnb by operators of illegal hotels.

New York passed a stringent law to limit short-term rentals like those offered by Airbnb in the company’s early days, and stricter enforcement now could prompt many hosts to remove their listings from the site. Airbnb will have to turn over addresses of rental properties on its site to New York’s Office of Special Enforcement, along with the names of hosts and information about how much of each property is available for rent and whether it is a primary residence. Rentals of less than 30 days are not allowed in most apartment buildings, unless the owner is present. According to a report earlier this year, which was partly funded by the hotel industry, around two-thirds of Airbnb’s income in New York comes from rentals that violate this rule.

Airbnb has claimed the city council has been swayed by lobbying from the hotel industry. The company produced a report last month pointing to council members who had accepted money from the hotel workers’ union.

A similar rule in San Francisco has been estimated to have reduced Airbnb’s listings by 50%. New York adds to Sydney Paris, Tokyo and Madrid as among the cities to restrict short-term holiday lets and is one of Airbnb’s five biggest markets, and the largest in the US. However, the company said that the five together represented only 3.4 per cent of its worldwide listings, reducing the significance of any individual city on its business.

10) Why is America so bad at information wars? [Source: Financial Times] 
While fighting al-Shabaab in 2011, Kenyan army officer Major Emmanuel Chirchir noticed that the Somali-based Islamist group was using donkeys to transport weapons. He dispatched a message via Twitter, warning the local Kenyan population: “Any large concentration and movement of loaded donkeys will be considered as al-Shabaab activity.” Al-Shabaab cyber-punched back, mocking Chirchir for threatening to bomb donkeys: “Your eccentric battle has got animal rights groups quite concerned, Major.” In his new book Messing With the Enemy, Clint Watts, a former FBI agent, describes this exchange as the first “international-terrorist-versus-counter-terrorist Twitter battle”.

On one level, this long-forgotten exchange might seem trivial. In recent years, there has been a deluge of grisly news about Islamist extremist campaigns. And more sophisticated cyber tactics have, according to the FBI, been used by Russian intelligence to undermine both US and European elections. Gillian Tett, the author says that the story of the Kenyan donkeys is rather symbolic right now. One way to make sense of today’s extraordinary cyber battles with the Russians is to look at how jihadi groups developed such campaigns years earlier — not least because this oft-ignored parallel shows how the US government has done a poor job fighting its enemies in cyberspace. This tale starts, as Watts explains, after the first Gulf war in the early 1990s, when terrorist groups such as al-Qaeda hurried to establish a global footing. This coincided with the rise of the internet, and al-Qaeda used email and online chatrooms to spread its message, with great success. Similarly, rival movements such as Isis and al-Shabaab emerged just as social media was taking off, and proved to be so savvy at using it to win recruits that they eclipsed al-Qaeda.

US officials attempted to fight back against Isis’s social media campaigns. Watts reveals that in 2013 while at the FBI — and later as a security consultant — he engaged in a long Twitter duel with American-born terrorist Omar Hammami. Other US intelligence groups tried to develop psychological-operations campaigns to fight the extremists. Some of the experimental techniques used to profile social media users were later deployed in the ad-tech industry by companies such as Cambridge Analytica. However, the US military was simply too bureaucratic, slow moving and rule-laden to match its enemies. And the country that seemed to learn the most from the social media extremists was Russia: Watts describes how he inadvertently witnessed Russian-backed groups populating American social media from the autumn of 2015 onwards, copying some of the tactics of the Islamists.

Some American cyber experts realized the threat this new Russian involvement posed. But their warnings were largely ignored by the media and government, since it was the jihadi threat that was dominating the foreign policy debate. The Russians were free, therefore, to expand their cyber activities into more corners of American political life. And, while Watts stops short of suggesting that Donald Trump was actively collaborating with the Russian president Vladimir Putin to spread fake news, he believes Trump was a “useful idiot” for the Kremlin’s interests.

Watts’s proposed remedy is just as startling: he believes that US government agencies are now so ill-equipped to fight in these type of social media wars that it is time for non-government groups to take the lead instead. Is this crazy? Many US officials would claim that it is and go on to point out that Watts no longer works for the FBI. But Ms. Tett says many leading figures in Silicon Valley furtively express similar views. Indeed, some appear to be quietly funding civilian “volunteers” to do exactly what Watts suggests: namely, hunt for ways to counter Russian attacks by infiltrating enemy cyber groups.