Economic Theories — The Tripod View of markets Sunday, Jul 13 2014 

Introduction

It has been a while since I last posted, and since then I have shifted cities, companies and the type of work that I do. And yes, have married and become a father as well. And most of those things have ensured that writing posts has become fairly rare. This week, I have some time and wanted to restart with an idea that has been floating around in my head for some time — The relationship between customers, employees and shareholders and how we can use this to analyse an industry.

The Components of an Economy

The standard economics books I have read say that a marketplace is made up of buyers and sellers, all seeking to maximise their overall value. But if we look at the world around us, the “market” does not seem to have much negotiating of overall value. Sure, the famous “invisible hand” is supposed to be working to ensure this, but it seems fairly invisible to me!

Instead, I have been trying to see economic principles with respect to three components of the economy that I see in daily life whenever we buy (or sell) something.

One, the person who buys the goods, who is called the buyer, customer, client, sucker….depending on the industry you are in.

Second, the shareholder of the company, or the proprietor of the firm who is selling you the stuff that you are buying

Thirdly, the employee who actually delivers the stuff that you buy. In some cases, like my local barbershop, the employee may be the proprietor. In other cases, like my bank, there may be many employees who deliver the product to me.

Most economic textbooks take the employee as one of the costs of production, and then say “TaDa….standard buyer seller model!”, and they are probably right. However, it may be interesting to take all three components and work to see what sort of dynamic evolves when you have a perfect market.

The Example — Telecom in India

The context and industry overview

One of the more interesting examples of this interaction was seen in the Telecom Industry between 200-12. For various reasons, which need their own blog post to discuss, there were a very large set of telecom service providers in India in this period. While 10-15 service providers does not a perfect market make, in the oligopoly that is telecom, this is not at all common. As a comparison, most developed markets have 2-3 major players in mobile telephony and maybe 1 or 2 minor competitors. So 15 service providers is quite a large number in the relatively low margin telecom world in India.

As most economic theories would tell you, when you have a larger number of sellers, this would ten to drive down prices and make companies try to grab customers any way they can, and that is exactly what happened. Indian mobile phone tariffs plummeted, with already low call charges dropping to the lowest in the world. 

Analysis — A free for all, and what ensues.

One of the things that I expected was that telecom service providers would start differentiating themselves in this crowded market with solutions that were tailored to individual market segments. This would mean that one of the service providers would capture the corporate data market, while another would be targeting the low margin, but high volume retail voice market. In other words the world of Telecom would start to resemble the world of soap sellers, with one group saying, 20% moisturizing milk and the other group saying, “the soap of the stars”.

But that did not happen….at least from my perspective. Instead, tariff plans across the board seemed to converge in a pure price battle, as if all the businesses had no other alternative.

So you had this weird situation, where there were 15 mobile service providers but none of them were any good. Customer service was a joke, and any kind of customization that was requested was inevitably met with “Our Policies/systems do not allow this” My first instinct was to say that these companies are stupid. Why are they not investing in building a differentiated model? It would make so much sense!

But these companies are being run by smart and knowledgeable people who know way more about the business than me, As an example, one of my classmates at my Business School (who is definitely at least as smart as me, and is more hardworking too!) is working for one of those telecom companies. And as top management, I was sure that Sunil Mittal, and Arun Sarin (at the time) were no mugs either. So why could they not figure it out?

So, i changed my assumptions. What if they had figured it out, but something was stopping them? It could not be management quality, so what could it be. The other two alternatives are people, and capital. And now things became a lot more understandable!

Results — The unfortunate trio

First, some context. Any company needs to return cash to its investors (and certainly its lenders). There needs to be some amount of revenue that HAS to be set aside to ensure that capital providers are remunerated. And in telecom, the major expenses are spectrum fees (one time, usually financed with debt) and employee costs. I am deliberately excluding network costs and tower costs, which are not insignificant, but which muddy up the waters in this analysis.

So once you pay the debt holders (which should be non-negotiable), you have to distribute profits among the shareholders and employees. However, the hyper-competitive nature of the industry meant that nobody was making a lot of money. So companies could not pay their shareholders very much….and even though there was a lot of demand for telecom employees because of the number of companies, the sheer cash crunch at companies meant that employees were not getting paid that much! So employees at these companies were not happy at all. Wage hikes were below their expectations, and work hours seem to stretch longer and longer!

“What about shareholders?”, you may ask. Well, shareholders were suffering too. From what I could see, Vodafone India was not making enough money to break even, so Vodafone Plc needed to invest in India. Bharti Airtel, decided to try to diversify its holdings by moving out of India, which needed a lot of debt, which in turn has depressed their earnings per share. Reliance Communications tried playing the volume game, and for some time was the largest telecom company in India by subscribers (maybe it still is, but I don’t think so). But because its subscribers did not really make it much money, it also had to take on a huge pile of debt. Tata Docomo, which started the fare wars in India with its famous 1p per minute tariffs is yet to make a profit (I think). 

Now customers should have had a great deal! But that does not seem to be true either. Sure, the number of subscribers shot up dramatically, but I have yet to meet a satisfied telecom subscriber! Service quality across the industry has suffered, and network congestion means that signal drops are (relatively) common across all service providers.

Conclusion

None of the three stakeholders in the industry are entirely satisfied with the status quo. As shareholders go, three of the smaller competitors seem to have disappeared (with some help from the courts). With the reduction in competition, we are now seeing a more traditional competitive landscape (though how long it lasts is a question mark). Companies are reducing debt and raising equity in an effort to ensure that risks in their capital structure are reduced.

At the same time, customer tariffs are beginning to rise, though tariffs in India are still among the lowest in the world. But as a result of the risks taken in the 2007-12 period, data tariffs rates which are too high for the average Indian ensure that data is yet to drive the profitability of these companies meaningfully. The road to providing differentiated services to customers is still not taken.

And employees? They are usually the last to benefit in any business cycle, and my own guess is that wage hikes and addition of hires would only begin after profitability of the companies improves significantly. 

Final Thoughts

Competition is supposed to be an unmitigated good. However, the telecom industry does not seem to accept this, and globally we tend to see that the industry is captured by 2-3 players. There are multiple and complex reasons for this. The jargon terms here tend to be network effect, regulation, spectrum auction policies and stuff like that. Whatever the reasons are, the impact of having multiple players is not an unconditional good. 

In later blogs, I shall try to use the three party stakeholder system of economic analysis on other industries to see if any conclusions can be drawn. But this example is one that makes me wonder whether free markets are actually a stable equilibrium state, or is like a tripod, which can be tipped over with an imbalance from any side?

 

blogging from cell phone Tuesday, May 29 2012 

This is a test post from my phone. I’m pretty impressed with how it works.  In fact it is so good that I think it can be used for all my posts in the future.
Hopefully, this will increase the number of posts I will be able to put out.  considering the stuff I think number is zero, I guess anything would be better.

Thinking and computing how human beings remember –II Sunday, Nov 6 2011 

This is part II of the post that I began a couple of days ago. In the previous post, I covered how human beings remember, and also to a certain extent, how computers work.

So now, lets cover some more complex memories. How do we remember things like say Newtons First Law of Motion? Oh wait, I know this one. “Any body remains in a state of rest or in a state of uniform motion in a straight line unless acted upon by an external force”. It took me a couple of seconds to remember this, but I think it’s a pretty good definition.

The definition of Newtons First Law of Motion is a pretty standardized thing. It involves a sequence of words which are in a very clear sequence and make absolutely no sense if you do not put them in the right order. I can’t remember this if I put it in my splendid data warehouse of my previous post. If i try to remove any pieces of data in this definition in the interests of quicker recall, I will screw up the meaning itself, which just would not do. So how is it done.

Again, the mechanics of it are probably beyond my abilities. Something to do with REM Sleep for all I can tell. But conceptually, we can think of this procedural memory or sequential memory more in terms of our standardised data warehouses that exist today with computers. If a computer were asked to quote Newton’s First Law, I am certain it would do a far better job than your humble blog author here.

This is a part of information retrieval that the computer is inherently better than human beings. We suck at definitions and tests. It took me almost 15 days of slogging 4 hours a day to memorize the key parts of my commerce textbook. And yet, the only part of it that I can remember 14 years later is “Money is a medium, measure, standard and a store.” That is pretty bad, considering I can still do a 10th standard Physics Paper today and expect to at least get 75-80%.

So what makes commerce so hard to remember and physics so easy to? Is it because I use physics every day, and commerce never? Well, that does not wash, because I work in a bank! The closest I get to physics is the advertisement for Physics Tuition’s that I see while standing and waiting for my train to take me to work! In my case, I suspect it’s because I genuinely learnt the concepts behind each of those physics definitions I memorised. So, I understand that uniform motion in a straight line can be expressed as similar to a state of rest in an ideal world, however odd it may seem at first glance.

In someone else’s case, this might be completely different. They might consider the 10 features of a joint stock company to be so logical that they might not be able to understand why I could not remember them. (My mom is one such example). But once I get this insight, the rest of my theory is now obvious. Even in cases where we memorize extremely long sequences of events, long-term recall is ensured by understanding of the basis of such a sequence. Else it would seem exceedingly unlikely that any person would be able to memorize and retain the memories in a loss-less manner unless they either understand the concept/context of the memory perfectly, or if they relive the memory so often that its brought into the intrinsic data warehouse explained in my previous post.

One final example to belabor the point. If someone were to ask me what is 12 times 12 I would be able to answer 144 without a second thought. But thinking about it, the concept of arriving at 12 times 12 is quite laboured. If I tried doing it from first principles, it would take me at least 5 minutes to re-understand the concept, and then to apply it to this specific case of 12×12. This is the fundamental difference between the “intrinsic” memory of the brain, where we store our most our automatic responses, and the “learned” memory of the brain, where we store corollaries, and concepts that don’t need reusing all the time.

Now, this does not really add anything. It’s just a neat (in my opinion) understanding of the way memory works. But the key is if someone were to figure out a way to segregate these memories, build short-term data warehouses that computers could access instantaneously and “guess” answers while they search their complete data banks to get the “right” answer, we would have a pretty neat form of AI. Now, I have not seen Watson, who is supposed to be the computer who is the Jeopardy Champion, but maybe Watson’s AI has this sort of guess algorithm, where if Watson has an answer which is significant to 2 sigma, he presses the buzzer.

I have no clue as to how AI algorithms and machine learning theories work. But if the any of them use the thought process that I have set out, it would be intriguing to see where it would finally end up.

P.S: If you, oh reader do know AI programming and think my views are hokum (or otherwise), I would love to be told so. I would love comments on this topic, especially as my own knowledge of this field is so inadequate.

Thinking and computing — How do human beings remember? Thursday, Nov 3 2011 

Yesterday, I spent some time with a couple of friends trying to find an answer to one of man’s oldest questions. “How do we think and remember?”

First off, let me say this. If you are looking for mysticism and godly type stuff, this is not the page to visit. Second, these thoughts are my speculations. I have no background in this stuff so if you, oh fine reader are an expert and know more than me, please do enlighten me. I cannot pretend an expertise I don’t have.

If any of you have queried computer databases, you have probably sat twiddling your thumbs while the database looks through every row and column of the entire data set trying to find the relationship that you are looking for.

But if you ask a person, “do you know that guy?”, the other guy would probably be really quick at figuring out if “that guy” was really known to him or not.

If you think about this, its amazing. Modern hard discs can parse through a few hundred Megabytes of data in a couple of seconds and can literally do trillions of operations every second. And here, a humble human being can parse through all the data points that make up his/her memory and remember a face or an incident.

I am not going to try to figure out the mechanics of how the brain gets to parse through its data banks. I am sure it has to do with synapses and neurons and proteins and stuff. But I am going to try to look at it as a data manipulation problem. Assuming the brain stores a 100 billion bits of information, and that it would take a finite amount of time to go through those 100 billion bits, you can sort of work out the time taken to recall a particular set of information.

The problem is that for the brain, its not exactly a linear search process. For example, we can remember the sequence of numbers from 1-10, but at the same time, have difficulty remembering certain words…(its at the tip of my tongue!). Essentially, the number of bits of information in a word and a sequence of numbers may be the same, but the way the human brain retrieves this information is different.

Of course, I am not the first to come up with this funda. People before me have come up with this “short term memory” and “long term memory”. They even make funky analogies of RAM and Hard Disk Drives to explain it.

But I think I have stumbled upon an idea. Its always puzzled me how human beings are so awesome at retrieving information compared to computers (which ought to be even more awesome, considering their perfect recall and blinding speeds of manipulating data.). Then I actually sat and thought about it. Does having more data and perfect recall actually make you better at retrieving information….or worse!

Let me illustrate this with a practical situation. A computer records a face perfectly. It stores Ms. N’s face as a 1920×1080 pixel image, with each of those pixels having several properties (colour, tone, brightness, etc). This essentially translates into a huge pile of data which can be up to 8Mb in size. In my head however, N’s face is not stored at all (she would be the first to agree). Instead the idea of N is stored. Its a bit hard to explain because everybody stores personal details differently in the privacy of their own mind. But the best I can come up with is that N’s face is buried into this really complex data warehouse, where the number of bytes that actually represents her face is a lot less than 8Mb….it might only be a few bytes of memory.

But the advantage it gives me is game changing. Firstly, as the data that is N’s face is actually stored as part of  a data query, and is a lot smaller in size, my comparatively slow speed of access is offset by a huge advantage in my software. My mental database is exceedingly efficient at parsing through massive data sets precisely because I don’t actually store all the data that a computer stores.

This of course leads me to a weakness. I cant exactly tell you how every pixel of N’s face looks. At best, I can recall maybe 10% (probably closer to 1%) of N’s facial features. My computer is probably way better than me at remembering those details. So if I want to figure out how N looks like, I don’t try to bring a picture of N in my minds eye. I just do not have the capabilities to do that good a job of it. Instead, I take a look at her photograph, which is way more detailed than I could ever be.

In my next post, I shall try to cover the other part of memory….which is rote memory. Its how I passed my commerce examination after all! Finally I hope to draw an analogy between these types of memory and data manipulation by computers.

So stay tuned. Till then ta ta!

Godly cash flows Sunday, Mar 15 2009 

People think that the credit crunch is a creation of the 21st century. However, like the religious fundementalists say, all things are there in the scriptures. The Gods of India have a practical example of how individuals with low credit ratings are forced to accept loan terms which are frankly usurious. In contrast, we shall also see how a well managed fiscal plan makes living comfortably.

Our tale begins with Mr. Venkateshwara, a young god with a great deal on his hands, but not much hard cash to his name. One fine day, he finds this young lady and decides to marry her. But the young lady is not content with a simple court wedding. After all, this is a god’s wedding, and must be celebrated with the pomp and ceremony it delivers. So, Mr. Venkatashwara goes to Kuber Bank, a closely held firm controlled by its namesake, and requests a personal loan for marriage expenses.

Now, Kuber takes one look at the impecunious Venkateshwara (also called Balaji), and decides that this young man is what would be called sub-prime. And not only is he sub-prime, he also wishes to use this loan on a mere consumption expenditure rather than investment purposes. Automatically, the interest amount is now increased appropriately by rating the borrowers risk accordingly. Venkateshwara’s repayment philosophy also seems a bit dubious. Based upon this wedding, he intended to set up a temple where people could worship him, and thereby pay off his debt.

Well, to cut a long story short, due to low regulation, Kuber bank did make the loan to this sub-prime borrower, albeit at an interest rate that he considered was appropriate for such a high risk loan. As it turned out, Mr. Venkata’s temple was a spectacular commercial success, raking in over Rs. 500 crores a year (approximately INR 5 Billion).

But that is not quite enough. From the records that mythology provides us, this only counts as payment towards the interest portion, so that Mr. Venkateshwara stays out of the term “Stressed Asset”! So Mr. Venkateshwara, inspite of having fantastic cash flows is still indebted. If records are to be believed, he will only be able to pay it off at the end of the universe itself!

On the other hand, about a 1000 kilometres away, we have the example of Mr. Siddivinayak. An astute god, based out of India’s commercial capital, Mumbai, he has access to the finest financial consultants (the ones who believe that cash is king) in the world. Having been exposed to the business world’s ups and downs, he maintains a low level of financial leverage, ensuring that his debts to the Kuber Bank are always promptly paid off. As a result, although his revenues from his temple are at a comparitively paltry Rs. 50 Crores, he is comfortably in cash.

So there ends this lesson from mythology.

Oil Prices–Price Elasticity Friday, Mar 13 2009 

Well…my last serious post on oil prices can be found here. Back then, oil was at $80 a barrel. Since then, oil went up to $147 and is now at the mid forties after dropping all the way down to $30. Does economics explain this phenomenon? Well, lets have a go with that most amazing of tools, hindsight.

The total demand drop from 2006 to today ranges between 2 and 2.5% . Assuming that the predictors were expecting a gain of 1.2% yoy (a reasonable prediction), the notional demand drop would then be about 5%.

At the same time,  production has increased by about 1.5% over the same period.

In this period, oil prices have risen to $140 a barrell from about $40 and have come back down to about $40 a barrell. Can conventional price Elasticity explain this?

Even assuming the widest variations in demand and supply, we have about a 6% variation in demand and supply. This ^% variation has led to a price change of almost 300%. This would mean that demand and price have a multiple of 50. By my previous calculations, the multiple  was closer to 10 than 50.

So economics does not seem to completely explain this massive change in price. But what if the underlying multiple of 10 was also leveraged?

The theory behind perfect marketplaces is that more players there are, the more clearly the price in the marketplace would be provided. However, in oil, the actual deliveries are fairly small compared to the speculators who trade in oil contracts. In theory, these speculators are supposed to provide liquidity to the market thereby enabling it to find true price without distortions introduced by large market participants.

The problem here is that sometimes speculators themselves distort the market. In a bull market,  every speculator went long on oil, which distorted market price and ensured that the real price soared well above the price that the oil sheikh needed to purchase his private A-380.

However, the reverse also occured. When the bubble burst, the speculators had leveraged their positions, and now had to sell at any price in order to exit the market. This led to an equally dramatic price drop which has seen oil drop back down to $40 a barrell again.

Of course not all of this is due to the evil speculators. The US Dollar has been appreciating against almost every currency due to a flight to safety. A rising USD means that the Arab Sheikhs (who sell their oil in dollars) can now buy those English Football Clubs cheap. This also tends to drop the prices, and cannot be ignored.

Notes: The data is approximate but the base from which it was taken was the  International Energy Agency report of February 2009.  Any mistakes and incorrect assumptions are my own however.

Note 2: The strong dollar affects other things than prices of Football Clubs.  :)

Boom & Bust: Reason or Panic? Tuesday, Oct 28 2008 

Its been a fantastically long time since I last updated anything, but that is not for lack of things to write as much as because of lack of time and effort to put thoughts onto computer!

Well, no Management/Economics type blog can ignore the current economic Superhit show that is playing on all Business News Channels today, and mine is no exception. People are blaming the current mess on US Housing Market bubbles or irresponsible lending or greedy managers, but is that the REAL reason for boom and bust?

I am sure these are reasons for the current mess, but why not try to see if there is a deeper underlying principle here? And this morning, I finally think I have found one.

First the Assumptions:

1. People Consume all they produce

2. Productivity is something that is consistent and measurable.

3. Inflation does not exist (I know…silly one that, but will relax it later)

The Logic

Economic Growth is something that makes peoples lives better. Quantitively, economic growth means that people have more ability to purchase goods and services. This is easiest measured by money. If you have more money in your pocket, you are doing better than you were. The same is true for countries as it is for people. The more “Money” a country has at its disposal, the better it is doing.

So, how does the money that a country have increase? Well, its simple really if you think about it. There are 3 basic ways.

First of course, is if the people in the country work more. Lets say they all had 5 day weeks. Now they suddenly decide to work 6 days a week. Suddenly they would therefore produce more goods and thus would have more “money” (assuming all the increased goods are sold at the same price)

Second is if more people were to start working. This is 2 components. First, all those new young people joining the working population. Second would be if the retirement age of the country went up, thereby increasing the workforse. (This is assuming that all those who reach working age get a job…not all that easy!)

Third is if those who are working suddenly become more productive. Thus if a worker were given a new thingummijig that could increase his production rate, then more goods would be produced in less time with the same amount of workers, increasing the workers wealth. (Of Course, assuming that all that increased production is sold for a good price.

So this is my economic theory. ” The maximum long term growth rate of any country’s economy is the product of the growth in working population, productivity and hours of work.”

This seems very simple indeed. And the Boom and Bust that we see in today’s stock exchanges seems to me to be comeuppance for the rise that the Indian markets saw post 2001.

If the stock exchange rises by 50% while the constituents of the exchange grow by 20%, then the assumption is that the stock exchange has priced in an increase in one of the three parameters that I had laid down. But how much can productivity and workforce increase so that you can maintain the increasingly dizzying valuations that were used for companies?

So, now the Indian market begins to make sense. It may look irrational, but that is only because we lack the timeframe needed to judge things. Ideally, the stock market should have stagnated until its companies reached the size that justified their valuation. However, like a governer hunting for the position of stable equilibrium, the market had overshot the fair valuation and bumped the value too high. Now, in trying to find the fair value, the market has actually beaten down (certain) companies to values that are well below their actual capabilities.

Of course, the problem with spikes and troughs is that they tend to make the fundamental premise of economics fail, which is one where we believe that the market has rational decision makers. Todays markets are ruled by fear, and have little of the rational among them.

So what started out as reason is now culminating in panic. And I am now finally buying stocks…after 2 years of looking at the markets as a mere speculative gambling table, it looks like there are quite a few valuable gems lying there getting ready to be picked up. So like Warren Buffet says (or should have said)… a panic selloff is the time for the rational investor to buy.

The Productivity View — better is good? Tuesday, Sep 2 2008 

Well, its been a VERY long time since my last post, but never fear loyal readers, I am back!

Today I was looking at a ragpicker on the road, and thinking that it would be really simple to make her life a bit better by giving her a pushcart in which she could push higher loads of stuff collected and thereby earn a higher income. This is what is called a productivity tool, which is supposed to make the world a better place.

And surely, improving that ragpickers productivity might make it better for the ragpicker, thereby helping society! But a bit of thought brought some counterpoints.

Now economic theory states that if the ragpicker got a a huge competitive advantage by having a cart, a lot of people would have jumped on and bought/rented carts in order to improve their own productivity as well. This would make the entire ragpicker population even more productive than it used to be. Surely, that is a good thing?

Well…maybe not. You see, although the amount of garbage that the 17 or so million people in Mumbai produce is monumental, its not infinite. At the end of every day, the ragpickers of Mumbai, however unproductive they are, have sifted their way through the morass of dross, and have found their little pieces of gold. So improved productivity would therefore mean that the ragpickers would merely be done faster….not produce more gold from dross.

Well, even then, that would be a good thing undoubtadly. A ragpicker who is done by mid afternoon could attend evening school, get a mechanics job, move up in life, and then improve economically. But lets consider for a moment that the current system is a level playing field…mostly. The late wakers are not shut out, as they would have been if the early birds grabbed eveerything. So, although the total wealth out of picking through garbage would be the same, its distribution would now go to those who woke up earlier, and scouted out the best piles.

This greater inequality in wealth distribution would be accomplished by those with access to better information on which localities are putting out good garbage, or who can anticipate which garbage will yield better returns. Previously, even if people held this information, they could not corner the market, as the information flow filtered down before they could grab it.

This seems to show something strange. Improved productivity does not lead to better conditions for all. Infact, in this case, it leads to much greater inequality. And this is what I would call the productivity trap. In a place where productivity improvements do not lead to increased sales/offtake as well, it only would lead to inequality.

Of course, there is always a silver lining. If you are a nimble company (or a person) and can see that the existing players are unproductive, you can move in and quickly make yourself a number 1. However, be warned that your advantage depends on you having a productivity too that can’t be copied….and no one seems to have come up with one as yet!

So there you go….another rambling post, but my tale is done for now. I will post on slightly less garbage like topics sometime later. Till then… Ta Ta!

General Update Tuesday, May 27 2008 

Well, its been some time since I have posted anything. So, I guess its time that I deliver a general update on life, the universe and everything (almost) that I am doing.

Well, the groves of academia have hereby hurled me out, ensuring that I get to face the real world again. And from the small and sleepy university campus of IIT Kharagpur, I am now at the western corner of India, in Mumbai, the city that almost lives up to its reputation for never sleeping

I have joined my work with YES Bank, and the hours ensure that its certainly a good excuse for not posting (although I shall not use it). But rather than talk about work, why not the city?

Mumbai is a unique place. Each of India’s metropolitan cities is different, but Mumbai revels in its uniqueness. Everything, from the city’s straight line like layout, to its odd working hours, its cobbled (almost) main roads where traffic rattles along day and night is unique. Mumbai is like a mad scientist on adrenalin, up to no good, but hiding behind a veil of equations.

Mind you, I rather like this mad city. Its very different from the sleepy Bangalore, and the early-bird Chennai. Even the sun sets later here than the rest of the country, with it being bright enough to play cricket at 7:15 pm.

Well, that is enough for the day. I will continue with more management gyan from my next post. Mumbai has given me at least 4-5 new posts on economics already up and running. But it will have to wait till I find the time to put them down on computer! Till then!

The War of the Currents Wednesday, Apr 16 2008 

Ok…its been aeons since I have done a history post…and even longer since a physics post, so why not do 2 in 1 and do both together! Its time to do a history of power transmission!

The Main Characters Involved

Once upon a time, there lived a magician. Almost deaf and self educated, he played a major part in the history of Industry. He was known for perseverance, and for a factory that burnt down as well. His name: Thomas Alva Edison, more colourfully known as”The Wizard of Menlo Park”

The second chap in this was  rather less colourful. He was known for an obsession with Railway safety and his major contribution prior to his adventures with electricity were his amazing invention of brakes for railways. Even today, the air brakes that are used today are a product of George Westinghouse, who shall be called “Moneybags

The third chap here is as much of a character as Mr. Edison. Rather than Gandalf, it was he who was first called “Wizard of the West”. A mathematician and an inventor, he was a former employee of the Menlo Park wizard. After some harsh words were said on both sides, he quit to fight his battle for efficiency and superior science. His name: Nicola Tesla.

The Technology:Sneak Peek

So what did these chaps fight about. It was no less than the way the new magic of the century, electricity would be transmitted. It was a battle between Alternating Current and Direct Current. The battle between AC/DC.

On the DC camp stood the reigning champion, and knight of the American derring do spirit, T A Edison.

On the side of  AC, the challengers were an embittered Nicola Tesla and Westinghouse.

The Rivalry Begins:

Nicola Tesla was originally a humble scientist, working under the heel of an acknowledged genius in Edison. But Tesla was also a super mathematician type dude, while the more prosaic Edison was merely a brute force experimenter. Tesla was a huge fan of the newfangled Alternating Current that promised revolutionary change.

Edison though was not entirely for things that used imaginary numbers and wave equations. In his opinion, if you had to use things like root of -1, you were off your rocker a wee bit. But being a fairly loud-mouthed guy, he proclaimed to Tesla that if he ever got an AC motor working, he would get a bonus of $50,000 (no mean sum at the time).

Tesla of course was truly fascinated by that grand sum. He spent days working, and nights calculating under the patented light bulb of Edison and Swan’s GE. Finally, after months and years of toil, he came up with an awesome AC generator that works. He goes smiling proudly to Edison, and shows it to him.

Unfortunately for him, Edison was a bit deaf. He claimed that he never heard himself say such a ridiculous thing in his life, and laughed at Tesla. It might have also been exacerbated by the fact that Edison never really understood the principles by which AC power was generated and transmitted as well.

Tesla decided that this would not do, and ran away in a huff, threatening to do Edison in someday. Thus a magnificent rivalry was born.

Enter Westinghouse

George Westinghouse was no mean inventor himself. With patents pouring in for railway safety brakes, and a machinist par excellence, he was an inventor in the mould of an Edison. Unlike Edison though, he was also a big believer in the utility of calculation and mathematics in invention. Spotting Tesla out of work, and digging ditches in New York, he realized that he had an ideal employee on his hands.

Back to Technology– The Numbers

Edison’s DC current is comparatively easy to understand, and is based on middle school physics. Power transmitted is given by VI, where V= Voltage and I= current. However, power loss is given by current squared multiplied by resistance of the wire. At low voltages, the power loss is rather large, unless the diameter of the copper wire is made terribly large. However, high voltages were deemed to be unsafe, and Edison was using DC voltages of about 110 Volts.

As a result, power losses made it impractical for Edison to transport electricity across large distances. The resistance would have killed him. Edison was nothing if not a canny businessman though. He started making tonnes of generators that generated electricity locally, and started selling them. This ensured regular sales of GE generators, because the effective radius of even the largest DC generators at 110 watts was a couple of miles.

Now, AC is a whole different ball game. The power loss is practically the same at a given voltage (we won’t go into the formula. Like Edison, I am not a formula guy!). However, AC has the huge advantage that it can be “stepped up” and “stepped down”

Enter the Transformer

The transformer was the device that made AC a great option. A transformer is a very simple device that converts electric voltage up or down. By winding more wires one way or another, you could generate power at one voltage, then transform the voltage up. From basic electricity we can say this:  V1I1=V2I2. When Voltage goes up, the current carried by the wire goes down. Power loss is calculated as I*I*R. Now, when Voltage goes up to 22000 or 40000 Volts, the current drops dramatically. Now, I*I it becomes very small, and power loss is lessened dramatically. Near the end consumer a transformer is used  again to drop the voltage to a usable level.

Of course, the catch was that a transformer could only be used in AC. It could not be used (for various reasons)  in DC format. The various reasons include esoteric terms such as inductance and flux, but this is not a post about physics, but history.

Return to the Battle: Publicity time

Westinghouse and Nikola Tesla  began to make an AC Generator that would unshackle the world from Edison’s DC generators. But it was hard toil. Firstly, AC current keeps cycling up and down, which in lightbulbs would mean a flickering of light bulbs as current cycled between two extreme values.

Then there was another problem. Cyclic voltage tends to do something nasty. The shifting voltages cause the heart to change to an irregular rhythm, which tends to lead to a quick trip to a nearby graveyard. Low Voltage DC does not cause any such problems. And Edison knew exactly how to exploit this unfortunate “feature”

Edison launched a campaign which attempted to prove how dangerous AC was. Initially, he started by electrocuting cats and rats. Soon, he progressed to man’s best friend.  Size of course matters…he continued by going after horses and then cattle. In a fit of extravagance, he completed this with a finale where he finished off an elephant with AC.

But this was not enough. The AC Camp led by Westinghouse was still winning. Now Edison was getting desperate. First he tried to replace the term electrocute with the phrase “to Westinghouse someone”. That did not work out too well though. It never did catch on. Although Edison was against the death penalty, his business interests now dictated he needed to do something radical. Size did not seem to matter in the war. Now it was time to change tack. He began a secret product called the “electric chair”. Soon an instrument of death was ready, and an unfortunate convict was ready as a test subject.

As a deterrent to crime, it was a staggering success. The dashed thing failed on the first attempt, merely leaving the guy with severe injuries rather than killing him. After several tries, he was finally put out of his misery, and it was described by one appalled journalist as, “It would have been kinder to kill him with an axe!”

Unfortunately, as a proof of concept, the electric chair was not quite an unqualified success. The tide was beginning to turn in the favour of the Westinghouse camp. Soon, the death knell for Edison’s generators was about to sound.

Niagara Falls

The Niagara falls were the holy grail for power guys. Here was a mountain of water falling a few hundred feet, which had the potential to generate enough power for the whole of the North-east USA (at the time). The catch? It was just too far away. Any chap who generated power in the Edison way could not actually transmit the damned thing without losses that crippled it to unusability. Westinghouse lobbied long and hard, and finally got the permission to generate power in AC so that it could be transmitted easily. And since Edison’s GE was too powerful to be ignored, it got the contract to transmit this electricity. With this, Edison ended his opposition to AC power, and the war of the Currents was won by Westinghouse and Nicola Tesla.

Epilogue

Tesla was known as the wizard of the west. There is little doubt that he was at least partly responsible for the way the 20th century became the century of electricity. However, his rivalry with Edison was not tempered with time, and it is curious that neither Edison nor Tesla ever won the coveted Nobel prize. Rumours still abound that it was jointly offered to the two of them, but Tesla refused to ever accept a prize alongside Edison. Later in life, he began to make futuristic predictions about wireless electricity, but these were never considered practical, so he was slowly shunted away from mainstream science. But he forever gloated about his joy at defeating Edison.

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