URSABLOG: Economical With The Truth

I’ve never studied economics – well not formally – and I am coming to think that this is giving me an advantage to understanding the world, particularly in my corner of the economic world, shipping. The biggest advantage I have is that I haven’t been indoctrinated by classical, or worse neoclassical economics from an early age. This has meant that as I have learnt on the job how my market works – not just shipping, but the ship sale and purchase market – I have been able to observe how rationality, or specifically actions by rational agents acting rationally in their own interests is not as, well, rational as it first appears.

And that seems to be part of the problem. Maritime economics, such as it is, seems to be an attempt by those interested in economics and shipping to shoehorn neoclassical economic theory into shipping, rather than develop theories that come out of shipping itself. No-one seems to have thought that in shipping the four factors of production – land, labour, capital and enterprise – don’t really apply, particularly as far as land is concerned. True it can apply to ports, and shipbuilding and ship repair yards, but these are not really about ships. Ports are more about the interface between land and sea, and shipyards are manufacturing ships (just as ship repair yards are repairing them) and therefore belong to infrastructure and industrial models rather than to shipping itself.

Shipping is about ships, and the demand for ships is derived from the demand to move around goods and cargo by sea. Whilst I understand the importance of supply and demand – of goods and cargo over time and space in trade, of ships in the freight market, and the number of ships definitely available for sale (or not) in the sale and purchase market – I have never really understood the relevance of the holy grail of “equilibrium.” That drearily deceptive demand and supply curve does not explain anything much in my world of shipping.

The standard textbook by Martin Stopford Maritime Economics is in fact more a book about the practical features of the shipping industry rather than offering any particular economic insights or theories into the uniqueness of shipping itself. Whilst I appreciate the importance of such a book to those new to shipping – academically or practically – it doesn’t, to me at least, help in thinking about how markets develop and change, and therefore how the shipping industry will be affected.

There are honourable exceptions of course. Manolis Kavussanos of the Athens University of Economics and Business has brought in aspects of applied economics to shipping, and whilst I don’t always agree with his conclusions he at least he is thinking about shipping from within and trying to apply analytical tools to shed light on areas that would otherwise be kept in the dark. Jean-Paul Rodrigue – a transport geographer – has inspired me to look deeper into transport systems with shipping as a valuable part of it, and his anatomy of a bubble – applicable to many different markets – has been profoundly influential. And Roar Adland – an academic and then an FFA trader, and then an academic again before heading SSY’s research desk – who has valuable and pithy observations that go against the grain of received wisdom, and are much more welcome for it.

But in these days of tariffs – reciprocal or otherwise – and trade wars, any discussion about the effects on shipping economically and practically seem to fall into one of two categories: “we’ll have to wait and see” or “it will be fantastic/terrible* (*delete where applicable). Both are backed up by one or two points that may or may not be relevant, but matter to the person saying or receiving the advice.

The problem is that there has been very little meaningful research, and it is not the academics or the Universities’ fault. Shipping, whilst hugely important to the world and how it works, is not a big player in the grander scheme of things, only relevant to those who have carved out a niche or to those that work in it. Whilst I may bemoan the lack of relevant academic research, I am part of a very small audience.

Our research desk at URSA – although only relatively recently established – has developed a strong and loyal following. Although they concentrate primarily on the dry bulk markets, I am sure their popularity is down to the philosophy behind their mission statement:

We maintain that all significant accomplishments originate from curiosity. Our Research Desk embraces an innovative approach to comprehending the driving elements of the dry bulk market. This approach encompasses an analysis of commodity flows, AIS data, historical market trends, the vessels involved, and many additional factors. We take pleasure in probing the dynamics of our surroundings, examining how the broader economic and regulatory landscape, along with the sentiment of shipping industry participants, impacts our market.

It is this curiosity – and a willingness to think out of the box, and explore other areas outside the strict confines of the dry bulk carrier market – that makes their output so good. Shipping is not just about shipping, after all.

So in that spirit, I was curious to read an interview with James K Galbraith about his new book Entropy Economics: The Living Basis of Value and Production. I am still unsure whether I will buy it: I read his account of the Greek financial crisis, in his short-lived (thank God!) role as an adviser to Yanis Varoufakis, the swiftly discredited finance minister in the SYRIZA government of the time. As my youngest sister will confirm, so infuriated was I by his assumptions and actions (and his apparent lack of concern for the ordinary people of Greece) that I threw his book Welcome to the Poisoned Chalice: The Destruction of Greece and the Future of Europe across the room in disgust not once, but three times.

Nonetheless – seeing as past performance is no guide to future performance – I read that Galbraith’s new thing is that the iconic supply and demand chart doesn’t actually capture the reality of how economies work, as it obsesses on equilibrium. General equilibrium theory rests on the idea that markets naturally balance themselves over time. It assumes all economies are just a collection of independent markets, each one perfectly matching supply and demand. This chimes with my own observations that this simply isn’t true.

Galbraith thinks the real issue is that economists have been avoiding one essential truth: entropy. In physics, entropy – a concept associated with states of disorder, randomness, or uncertainty – is the force that drives the universe, and is fundamental to all living systems, including economies. But neoclassical economists have stubbornly stuck with equilibrium, even though entropy and equilibrium are incompatible. One is a universal law of nature; the other is just a convenient abstraction.

I won’t bore you with the interview – let’s just say it covers the usual talking points of bitcoin, climate change, geopolitics, trade wars, Trump and so on – which leads me to suspect that Galbraith is once again trying to tell the world that they are wrong and he is right, but the concept of entropy intrigues me.

As far as I can gather, entropy – as far as physics is concerned the measure of a system’s thermal energy per unit temperature that is unavailable for doing useful work. The amount of entropy is a measure of the molecular disorder, or randomness, of a system. Its introduction by the German physicist Rudolf Clausius in 1850 was a highlight of 19^th century physics. I am grateful to Galbraith at least for bringing this to my attention.

Apply this to a market – say the ship sale and purchase market – and you have yet another reason why something doesn’t seem to make sense. The sale of a particular ship at an unexpected price is reported in the market and the comments range from “what do the buyers know that we don’t know?” right through to “they’re crazy!” via “the ship must be in terrible/excellent condition” and “they must be using other people’s money.” I am persuaded – as is Professor Kavussanos – that sentiment, good and bad, has an amplifying effect on the market, but maybe there is an element of randomness involved too. According to Clausius, spontaneous change for an irreversible process in an isolated system always proceeds in the direction of increasing entropy. Imagine an open system, like the ship sale and purchase market: spontaneous change will increase entropy. It is harder to predict what will happen, and therefore we should consider less about the “why” something has happened, and spend more time making sure we are involved in the next deal that will happen, knowing that although it may not “make sense” but is inevitable nonetheless.

My point is, I suppose, that making sense of what has recently happened in a market is probably a waste or time, or a distraction, because a lot of the time trying to justify something which has an element of randomness built into it will not lead to immediate enlightenment. And by the time we are enlightened it may be too late.

But the more I think about it, the more I think that Mr Galbraith has just come up with a new wheeze to go against received wisdom. That said, I still insist that a lot of maritime economics is more dismal than not, and the study of historical data using outdated and irrelevant tools without coming up with any new insights is, well, an uneconomical and inefficient use of time. In my experience shipowners only make profits – sometimes astounding profits, and sometimes appalling losses – when the markets are inefficient. Both situations bring opportunities, especially in the sale and purchase market. Those of us involved with the ownership of vessels don’t want equilibrium, or efficiency, because it doesn’t bring anything except breakeven, at best, and that doesn’t make life very interesting. Shipping markets are not meant to be sustainable, slow moving and predictable markets, because if they were they wouldn’t be able to react to the demands of a dynamic, fast changing and unpredictable world.

But I am an amateur, and can take an amateur’s joy in curiosity even whilst I try and profit from it. I am not an academic, and whilst I am sometimes jealous, I am never jealous enough to take the jump across to those tall, forbidding ivory towers. Better to be living in the world of shipping – this random, infuriating, beautiful world – rather than just observing it.

Simon Ward