I started reading "Boomerang" by Michael Lewis and after reading the first chapter on Iceland, I am tickled enough to discuss two interesting stories. It might seem that I am laughing at Iceland but I am not. In fact, if I am laughing at all, it is on errors of the ways we think as a group and individually. There is a systemic way we make mistakes and bungle up things. It is one of the reasons why we go through ups and downs in life and everything related to it (in particular, the markets).
The first story is a short one and is amazingly related to elves.
Iceland’s waterfalls and boiling lava generate copious amount of heat and electricity. Being an Island, it has no scope of exporting this energy to the outside world in a profitable way. There was a way in which this excess energy could be used: smelting aluminium. Smelting aluminium is an electrolytic process and uses prodigious amount of electricity.
In 2004, Alcoa (NYSE:AA) started building Alcoa Fjardaal smelter in an Icelandic town. But they encountered a very interesting problem. A large number of Icelanders believe in elves, because of their folklore. This is not very different from kids believing in Santa Claus. Except that we are talking about adults here. In Michael Lewis’ own words:
Before Alcoa could build its smelter it had to defer to a government expert to scour the enclosed plant site and certify that no elves were on or under it. It was a delicate corporate situation, an Alcoa spokesman told me, because they had to pay hard cash to declare the site elf-free, but, as he put it, “We couldn’t as a company be in a position of acknowledging the existence of hidden people.”One of my favorite authors — Douglas Adams of the Hitchhiker’s guide series (which was subsequently butchered by the movie) — said something quite apt.
I don't believe it. Prove it to me and I still won't believe it.A similar malady effects the people who do not believe in the global warming and changing weather patterns or people who believe in the apocalypse stories. Remember the Nostradamus stuff before the current scare? Or the May 21, 2011, prediction of rapture? Interestingly, these people do not realize their mistake but rationalize the failure of the predictions.
It is still disconcerting to see that the Icelandic government puts its seal on this stupidity. I wonder what these “experts” do to actually verify that there are no elves living around. Are you allowed to take trips to the site and after billing for six months or so you report that you found no elves? I think it would be interesting still to find out if they have actually rejected a site because of a thriving elvish population.
The second story is about the fishing industry of Iceland in the pre-investment banking era.
Fishing is not a great business. It is a commodity and because everyone has a right to catch as many fish as they want, it is not very profitable either. On the other hand, if you allow people to fish as much as they want, you will end up putting a lot of pressure on the fish population in the area. Overfishing can damage the supply of fish in the short term.
In these cases, generally a central authority issues permits. For example, in Switzerland cantons issue permits to shoot deers to cull over-population. But how does the authority decide whom to give how many permits? Distributing them equally makes no sense, as fishermen differ in their fishing capabilities. So, the Icelandic government decided to award permits depending on their previous historical capability of catching fish. So, if your family has been catching around 0.1% of the total fish caught by Iceland for the last five years, then you will get a permit for a similar percent of fish, every year until eternity. Even if the total amount of fish caught by Iceland changes from year to year, depending on the situation of the fish supply, you will get a similar share of fishing permit every year. This quota was fixed for perpetuity.
A byproduct of this was that if you do not want to fish then you can sell your rights for the year to someone who wants to. Pretty soon, all the fishing was done by people who were quite good and could fish efficiently. There was no incentive to fish if you can sell your rights at a price which will let you live comfortably. In fact, you can also take this permit to a bank and they will give you money against it. Some people became billionaires because their family used to fish a lot in the past. Oh the unfairness of it all!
This is not something unique to Iceland. I have a similar story from my hometown in India. We have a sugar mill which makes sugar from sugarcane. The sugar mill runs for four to six months every year depending on the season when the sugarcane is ripe. A particular mill has a capacity and it can only use that much of sugarcane. This creates an interesting problem. If you are a farmer and you want to plant sugarcane, then you can’t just do it willy nilly. You have to go to a sugar mill and obtain a permit to sell it a particular amount of sugarcane.
This permit is free, theoretically. The system is supposed to work in a very transparent way. You get the permit, plant the sugarcane, and when it is ready you sell it to the sugar mill. In practice, the situation is quite different. A few powerful people or people whose family had a history of growing a lot of sugarcane obtain the permits and then sell them to the hapless farmers depending on the bid price.
In these cases, each individual blames the group. “Everyone does it!” is the answer. Everyone believes in the elves, so if I don’t, I will not fit in. Political parties intentionally do things which many individual party members do not believe because of the fear of alienating their base.
A lot of times, thinking in groups leads to trouble.
Disclosure: I am long Alcoa (NYSE:AA).