Enough by John C. Bogle

Is there no limit to what enough is in modern society? Capitalism is at play. Management earn obscene amounts of compensation. Greed can cause a system’s downfall. How long can materialism and greed last? I have been given enough, in more aspects than just financially. My great grandfather was incredibly thrifty. My family was fraught with financial difficulty. I had to work when I was young in order to feed the family. I learnt to accept responsibility when I was young. I did well in school and mum put in so much effort into investing in my education. My attitude in life has been influenced by my family. The first ‘diamond’ of my life was my admittance to the Blair Academy. My family was incredibly close-knitted and that helped a lot. Later, I got admitted to Princeton University on a full scholarship. Even then, I had to take up temporary jobs for me to get paid. However, my parent’s marriage fell apart after that. I discovered that the mutual fund was new at that time and wrote about it. Mr Morgan was the boss of Wellington Fund. When I was 35, he said I could take over the firm. After a disagreement with the other shareholders, I got fired. My business model was to manage our affairs internally and not require any external party to manage it. Vanguard would have to do everything in-house if it wanted to succeed. Before 1875, I founded the world’s first index mutual fund. The fund didn’t need to be managed as the returns would track a basket of stocks that were representative of an index. ‘If you build it, they will come.’ Thankfully, we got approval from the SEC too. A donated heart was one of my ‘diamonds’ too. This heart enabled me to live healthily. Be blessed by the number of diamonds you have. Humans are all too interested in short-term gains. Companies should recount their past values which enabled them to thrive. Virtue doesn’t come from money. It comes from doing good.

Some men wrest a living from nature and with their hands; this is called work. Some men wrest a living from those who wrest a living from nature and with their hands; this is called trade. Some men wrest a living from those who wrest a living from nature and with their hands; this is called finance. – Old Epigram from 19th Century Britain

There is a food chain and the investor is at the bottom of it. The financial system cannot be too costly. We are often trading paper and paying bankers too much. In addition, the financial system is fraught with complexity. Young graduates like to enter banking. We should strive to do good in our jobs. Never let money alter your conscience. Do not invest in products which require you to pay high management fees etc. Serving your client is the highest priority. The sub-prime crisis was an example of extreme greed. The finance sector takes up too much of the earnings of the S&P 500. Sometimes, the markets crash but those people in IB keep making money. The ex-CEOs of Citigroup and Merrill Lynch were paid very well just before the sub-prime crisis. They were not penalised heavily after that. However, bankers earned nothing as compared to the hedge fund managers. The hedge fund industry demands high management fees and investors can’t survive. The number of CFAs are increasing all the time. There is an inherent disconnect between cost and value in our financial system. Humans have abandoned the traditional standards of investing. The author looks up to people like Benjamin Graham and uses value-investing. Speculation is rife nowadays. The cumulative costs keep growing. Does the financial system create more value than cost? My fear is that the finance sector is getting too big and out of control. There needs to be a financial system reform. As public investors, we should demand more from our financial system.

The motivation of too many of those rushing into finance is more aligned with what they can get from society than what they can give back to it. – John C Bogle

Too Much Speculation, Not Enough Investment. Investing is about long-term ownership of the business. Speculation is just the opposite and is about short term gains. One of Keynes’ famous works is the ‘General Theory of Employment, Interest and Money’. In the long run, the stock price must be aligned with the business fundamentals. Speculators cannot capture the inherent value in a stock. Markets are volatile because of speculators. In the expectations market, prices are set based on the expectations of investors. These are not based on ‘real value’ per se. We live in an era of speculation. However, it is true that investors win and speculators lose in the long run. Stock markets have crashed, just like on Black Monday in 1987. Short term outcomes can’t be predicted accurately nowadays. There have been little cases of black swans in the long term market. The financial system is prone to innovation. Learn to emulate tortoises. Market timing is not sound. Market timing doesn’t work. It is difficult to make the right decision consistently on market timing. We need to improve the balance between entrepreneurial innovation and more traditional values. We cannot allow the whirlwind of speculation to continue unabated.

In investing, tortoises tend to win far more often than hares over the turns of the market cycle…Placing large bets on an unknown future is worse than gambling because at least in gambling you know the odds. Most of the decisions in life motivated by greed have unhappy outcomes. – Peter L. Bernstein

Too Much Complexity, Not Enough Simplicity. Simplicity has been the key to successful investing. Technology has complicated our lives. There are many middlemen in a CDO offering. Some banks are also not concerned with the creditworthiness of such offerings. The market has been flooded with interest rate swaps, credit default swaps etc. The value of the derivatives market is huge. ‘As long as the music is playing, you have to keep dancing.’ The Federal Government has also backed such offerings. It is better to buy an index fund as it has better returns. Innovations have hurt investors. The winners are usually the fund managers or distributors. Innovations like stock index fund, bond index fund have done investors well. ETFs are great. However, they are being traded too frequently, leading to speculation. Some ETFs also do not contain stocks that track the stock market index. There are many different types of funds nowadays, like market neutral, hedging, commodities, private equity etc. However, please examine the track record before buying. Commodities are purely speculative in nature. Fund expenses must be cut if investors are to gain. Fund failure rate is very high amongst idiosyncratic funds. Some funds are not concerned with shareholder performance. It is time to get down to basics. The author believes that the simple way is the best way. The mutual fund industry often fails to provide market-beating returns. The fund manager should serve investor’s interests.

Too Much Counting, Not Enough Trust. We often place too much emphasis on numbers and trust them. Then, we have optimistic views on the future because of them. Even numbers produced by the government can be questionable at times. We need to understand the sources of stock returns. Do not project future returns based on past historical rates. This causes the expected rate of return of investments to rise. The bubble of investor optimism will have to burst someday. It is smarter to set your expectations for future earnings on basis of current sources of returns. There is a bias towards optimism in the future. CEOs often paint too optimistic pictures for earnings and analysts tend to agree with them. The standard for analysts has changed from GAAP earnings to operating earnings. Pro-forma earnings also exclude all the one-time losses etc. Creative accounting is a big issue nowadays. Pension holders might lose money on their investments and this will have other repercussions as well. Businesses like to use M&A to create ‘value’. For each M&A deal, the bankers and lawyers earn huge sums of money. ‘Paper’ companies have acquired ‘rock’ companies that make. In Vanguard, we believe in organic growth, not forced growth. Nowadays, we do not know how to ask without any numbers and this is a scary fact. Trust is important.

The first step is to measure what can be easily measured. This is okay as far as it goes. The second step is to disregard that which cannot be measured, or give it an arbitrary quantitative value. This is artificial and misleading. The third step is to presume that what cannot be measured really is not very important. This is blindness. The fourth step is to say that what cannot be measured does not really exist. This is suicide. – Daniel Yankelovich

Modern capitalism has two parts: there’s business, and there’s finance. Business is renting you a car at the airport. Finance is something else. – Michael Kinsley

Too Much Business Conduct, Not Enough Professional Conduct. Professional associations are now run like business enterprises. However, professionals should be responsible and selfless in their service towards their clients. Times have changed nowadays. Professional conduct is less well regarded as in the past. Too many banks are seeking competitive advantages at the expense of their customers. The battle for professional independence is never won. Trust and be trusted. Capitalism has eroded as well and this is a big issue. Owners’ capitalism has been transformed to managers’ capitalism. Institutional investors are a big thing nowadays. Managers are not acting as they should for their principal. Beware of negligence and profusion have prevailed among corporate management. How much should the CEO be compensated? It is hard to determine how much value a CEO has added. Sometimes, their salary growth outstrips the corporate profit rate. There are accountability issues. Institutional money managers hold a lot of power. CEO stock based compensation should be based on intrinsic value and not actual stock price. The compensation consultant has also become more popular. Many CEOs are also paid according to how they fair in their peer group. A basic set of ethical principles is needed to guide the profession. Financial engineering is getting more and more popular. Capitalism must be fair, regulated and ethical.

Money management extracts value from the returns earned by our business enterprises, and in the process of maximizing its own commercial benefits, the industry seems to have lost its professional bearings. – John C Bogle

Too Much Salesmanship, Not Enough Stewardship. The industry is characterized by salesmanship too. Mutual fund size has grown by a tremendous rate recently. Fund investors start trading funds instead of simply holding them. The holding period for stocks has been cut from 6 years to 1 year. Fund costs have soared as well. The fund industry is more like a marketing industry now. Investment focus has been truncated. Some funds are only created because of the latest market fad. There is a need for reform. We need to cut down costs for investors. Serve the investor for a lifetime. There are too many choices of funds out there and this makes people confused. There is a need to have long term investment horizons. Serve the long term investors. We must all return to the index fund. Put fund investors in the driver’s seat. Shareholder education takes time. The industry should aim to be objective and unbiased. We need to have an industry that is of the shareholder, by the shareholder, and for the shareholder. We need a mutual fund industry with vision and values. We must build companies that stand for something. Stewardship will pay off. It is important to keep the faith every day.

Too Much Management, Not Enough Leadership. Our large corporations are over-managed but underled. Managing and leading are completely different. The leader is more original. The leader should be able to inspire. They should care about the deeper values of the organization. There are 10 rules for building a great organization. 1) Make caring the soul of the organization. 2) Forget about employees (call them crew members instead). 3) Set High Standards and Values – and Stick to Them. 4) Talk the Talk. Repeat the Values Endlessly. 5) Walk the Walk. Action Speaks Louder than Words. 6) Don’t over-manage. 7) Recognize Individual Achievement. 8) Loyalty is a Two-Way Street. 9) Lead and Manage for the Long-Term. 10) Press On, Regardless. A superior company thinks about its dream. It also applies unconventional thinking. We were based on value profit chain concepts. I built a company that would endure. Businesses should have purposes besides making money.

The institution must be the object of intense human care and cultivation. Even when it errs and stumbles, it must be cared for, and the burden must be borne by all who work for it, all who own it, all who are served by it, all who govern it. Every responsible person must care, and care deeply, about the institutions that touch his life. – Howard W. Johnson

Too Much Focus on Things, Not Enough Focus on Commitment. Where are the things by which one measures one’s life? Don’t let things measure the man instead. Life is never smooth and we might lose our wealth one day. However, your character is the one that will endure. Boldness and commitment is all important. Commit the most to make a second life. It is crucial to be committed to your family. Commitment to neighbours and the community is also important. We thrive as human beings and have faith in ourselves. Give credit to those who have helped you along the way. You didn’t succeed on your own. Be bold and summon your magic.

Too many 21st century values, not enough 18th century values. Do not move away from the truth. Facts are everywhere. The Age of Reason occurred in the 18th century. Many of the great leaders spoke about the period of Enlightenment. Benjamin Franklin was a great leader in the 18th century. Joseph Schumpeter also described what an entrepreneur ought to be. Entrepreneurs and capitalists are not the same. Have the will to conquer, and the joy of a good battle. Franklin invented many tools for the public’s benefit. There are other motives for business other than profit. A man should have a mind to improve, a heart to cultivate and a character to form. Keep striving to improve. Return stewardship to capitalism. Lead with purpose. Virtue is all important. Franklin listed 13 virtues. He started his day by asking ‘What good shall I do this day?’ and ended it with ‘What good have I done today?’ His energy and persistence helped him in his public life.

Knowledge is not the personal property of its discoverer, but the common property of all. As we enjoy great advantages from the inventions of others, we should be glad of an opportunity to serve others by any invention of ours, and this we should do freely and generously. – Benjamin Franklin

The real test for an honest and productive society is not what a society has achieved, but what it aims to achieve. It can put honest people on a pedestal even if they do not maximize their personal benefits and preferences…and discard and shun as models of failure dishonest people who achieve their highest ambitions by fraud and abuse of trust. – Tamar Frankel

Too Much ‘Success’, Not Enough Character. We often chase success but success continually eludes us. Is success all about achieving wealth and fame? Financial wealth is not a good measure of success. Fame is a flawed measure too. Fame is used for other purposes now. One can contribute to society in a great way but yet not be famous at all. Power should not be used capriciously and arbitrarily. Power should be used for a worthy cause. Have we been chasing the fake rabbit of success? Success isn’t about meeting other people’s expectations too. You should just base success on your own expectations and make the most of your talents. We should admire those people in professions where they can contribute to society, but not achieve any fame or recognition. Modern life has forced people to be competitive. Life demands much more of us nowadays. What are you competing for? Without character and courage, nothing else lasts. To hone character, one must undergo tribulations etc. Be yourself and strive to be better. With age, you should better understand where the rabbits are. Challenge yourself and strive to be better. Chase the real rabbits of your life.

Success can be measured in our contributions to building a better world, in helping our fellow man, and in raising children who themselves become loving human beings and good citizens. Success, in short, can be measured not in what we attain for ourselves, but in what we contribute to our society. – John C Bogle

I long to accomplish a great and noble task, but it is my chief duty to accomplish humble tasks as though they were great and noble. The world is moved along, not only by the mighty shoves of its heroes, but also by the aggregate of the tiny pushes of each honest worker. – Helen Keller

Highly educated young people are tutored, taught, and monitored in all aspects of their lives, except the most important, which is character-building. But without character and courage, nothing else lasts. – David Brooks

What’s Enough? What is the relationship between happiness and success? Success is not the key to happiness, happiness is the key to success. Humans are resilient. Money only provides a transitory form of happiness. Autonomy, social interaction and competence are all important. How much money do you need? I want to give something back to the less fortunate. For example, give back to your alma mater. I also offered scholarships to the Blair students. It has been a thrilling ride indeed. I was born to save rather than spend. Our shareholders also have received superior returns. I do not like extravagance. My retirement plan is the largest in the family balance sheet. Saving early and regularly is the key for wealth accumulation. Postpone your first payment for Social Security. Stick with low-fund fees. There are still many people living in poverty in the US. The income disparity is growing. You must remember that you are fortunate but not all fellow Americans are enjoying it. The domination of the US will not happen forever.




Utopia for Realists by Rutger Bregman (Part 2)

A Fifteen Hour Workweek. Leisure time is scarce in modern society, but why is that so? By 2030, Keynes predicted that mankind would have trouble filling up their spare time. Earlier, Benjamin Franklin predicted that we would work 4 hour days only. Employers were not keen to let their employees work for so short hours everyday. Henry Ford discovered that a shorter work week made employees more productive. In 1938, legislation to protect the 5 day workweek was passed. After WWII, leisure time continued to rise. It was predicted that machines would do all the work in future. Working would only be reserved for the elite. The spread of boredom might be a concern for Mankind. There was a concern that too much free time would bring about boredom and idleness. Are scientists prediction of what life would be like in 2062 come true? The irony is that in modern society, the working week is actually growing. It has to do with the feminist revolution. Parenting is a lot more time-intensive nowadays. The smartphone might even lead to the ordinary worker working even longer hours. Consumption has increased a lot more recently. Would our standard of living decrease if we work less? Productivity and long work hours do not go hand in hand. Even in the modern society, 40 hour workweeks might be too much. Research has shown that 6 hours per day is optimum. Working less solves the problem of stress and leads to increased levels of happiness. It might solve climate change and reduce the number of accidents too. It might address unemployment too. Paternity leave is extremely important nowadays. It might address the issue of aging population too. Nowadays, people tend to show off if they are busy. There is not enough paid work to go around. Is the strategy of shorter working hours what we all want? The answer is yes. The countries with the shortest workweeks have the largest number of volunteers and social capital. We all are capable of handling the good life.

It’s quite simple, really. Time is money. Economic growth can yield either more leisure or more consumption. – Rutger Bregman

It is worth noting, however, that the line between work and leisure has blurred in recent times. Work is now often perceived as a kind of hobby, or even as the very crux of our identity. – Rutger Bregman

There’s not a person on Earth who on their deathbed thinks, “Had I only put in a few more hours at the office or sat in front of the tube some more.” – Rutger Bregman

Work is the refuge of people who have nothing better to do. – Oscar Wilde

Why It Doesn’t Pay to Be a Banker. The trash workers went on strike. The streets were extremely stinky. It actually pays to strike. These are essential services which actually do much good to others. However, wall street traders don’t do much. These are the jobs that simply shift money around. Now, in modern society, more people are able to earn without contributing anything tangible to society. Ireland did okay without the bankers for 6 months. It did not have a debilitating impact on daily life. Creating complex financial products actually destroys wealth. Why are we working harder than ever before? Many people admit that they are doing bullshit jobs. Banking is very exclusive to the elite few. Some people feel that their job had no meaning and significance. This is a problem with the capitalist society. The modern society is concerned with nothing but profit. Now, it is all about milking the cash without innovation. Just imagine how society will be if we just focused on creating things of value. It does not mean that you earn much, it automatically means you are contributing to society. In modern times, more people have sought to move to banking. We need to tax higher earners even more. A teacher has a direct hand in shaping the future. We need to intervene at the classroom level. Which knowledge and skills do we want in our children in 2030? A shorter work week allows us to spend more time on ourselves. Society determines what has real value. After the strike, the garage collectors had a significant pay increase.

Making money without creating anything of value is anything but easy. It takes talent, ambition, and brains. And the banking world is brimming with clever minds. – Rutger Bregman

The goal of the future is full unemployment, so we can play. – Arthur C. Clarke

Race Against the Machine. Machines help to eliminate certain jobs. Robots should help to reduce the average number of working hours. People are educated, but your skills might be superfluous after a while. Moore realized the power of computers and that it would soon surpass humans. Machines help in the transportation sector, such as container shipping. The ratio of capital to labour is not constant. Technology has been advancing at an astounding rate. Who’s profiting from this? There are fewer winners as time passes. Inequality has been increasing in developed countries. Many jobs are at risk to be overtaken by machines. It will come in the next 20 years. That are some that argue that automation will create new jobs. Productivity is at record levels in the 2000s. Even the most modern of computers can defeat chess masters. Robots can hone our mental capacities. Automated cars might take over drivers on the roads soon. By 2029, it is predicted that computers will be as intelligent as people. There is no limit for machine computing power. In 1811, some men declared a war on machines, but the machines won. The whole point of robots is for them to do tasks that humans would rather not do themselves. How can we compete against the machine? It seems like there is limited hope and that inequality will continue to increase. Should we continue to focus on education? However, the low-hanging fruit has already been plucked. Maybe a solution is to bring a hammer. Humans still have the ultimate say as to how to shape our destiny. We need a massive redistribution of income.

The reality is that it takes fewer and fewer people to create a successful business, meaning that when a business succeeds, fewer and fewer people benefit. – Rutger Bregman

The factory of the future will have only two employees, a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment. – Popular joke among economists

Beyond the Gates of the Land of Plenty. Should we try to give everyone on Earth the joys of the Land of Plenty? We spend a lot of money on developmental aid. Nobody knows whether it has helped much or not. Sometimes, the usage can be different than what was intended. Is the remedy worse than the disease? The first form of aid happened in 1998. Studies have shown that providing free textbooks does not improve scores. We all should aim to take the guess work out of policy making. Is it better to give out free mosquito nets or to sell them? Even microcredit has not been proven effective at combating poverty and illness. Handing out cash is better. However, not everything is measurable. There are the 3 Is of development and they are ideology, ignorance and inertia. There needs to be strong measures against tax evasion especially in poor countries. Opening the gates is one way to give the poor a chance. After the war, countries protected their borders tightly. The world is wide open except for people. Opening borders to labour would boost wealth tremendously. The inhabitants of the Land of Plenty are filthy rich. We turn away refugees way too easily. Americans earn a lot more than their South American counterparts. Opening the borders is one of our best strategies against poverty. However, people often lament that by doing so, you will bringing terrorists in. The risk of terrorism is low. Immigration actually reduces in a decline of terrorist activities. They are not all criminals. There is practically zero correlation between ethnic background and crime. They will not undermine social cohesion too. Diversity cannot be used to blame cohesion in society. There is an argument that foreigner influx can help create more employment opportunities. Will cheap immigrant labor force wages down? A think tank has showed that immigration has virtually no effect on wages. It is not true that foreigners are too lazy to work. Immigrants actually take less advantage of public assistance. Governments can set criteria for them and make it harder for them to get PR. One way is to create language and culture tests. Open borders actually promote immigrant return. Opening the borders is not something we can do overnight. Just cracking the door around migration will help us tremendously.

How Ideas Change the World. There were some people who believed that the world would end on Dec 21, 1954. This was a prophecy that failed. Humans tend to suffer from cognitive dissonance, where people recalibrate reality rather than amend their worldview. Humans tend to stubborn. The more educated you are, the more unwilling you will be to change. Can new ideas like a universal basic income truly change the world? However, people’s ideas can indeed change over time. Sometimes, a single opposing voice can make all the difference. Had we invested too much in our old convictions? There is a lot we can learn from Friedrich Hayek and Milton Friedman. There are lessons we can learn from Neoliberalism. The world is getting richer and safer. It is okay to dream and keep plugging away.

People are most likely to change their opinions if you confront them with new and disagreeable facts as directly as possible. – Rutger Bregman

Utopia is on the horizon. I move two steps closer; it moves two steps further away. I walk another ten steps and the horizon runs ten steps further away. As much as I may walk, I’ll never reach it. So what’s the point of utopia? The point is this: to keep walking. – Eduardo Galeano


Utopia for Realists by Rutger Bregman (Part 1)

How We can Build The Ideal World

‘A map of the world that does not include Utopia is not worth even glancing at, for it leaves out the one country at which Humanity is always landing. And when Humanity lands there, it looks out, and, seeing a better country, sets sail. Progress is the realization of Utopias.’ Oscar Wilde

The Return of Utopia. In the past, the world was much worse than what it was today. Poverty rates have fallen and life expectancy has increased. The last 2 centuries have seen explosive growth, like nothing mankind has ever experienced. People are 250 times richer as compared to the Industrial Revolution. People used to dream of a brighter future. Modern world suffers from problems like obesity, pollution etc. Modern medicine has allowed those who have suffered to live again. Driverless cars are on our roads. Internet access and smartphones are getting more widespread. Vaccines are useful to prevent diseases and pre-mature death. In terms of literacy, humans are at our all-time high. Although everything seems good, we may lack a purpose in life. We live in a capitalist and consumer driven society. How can we improve our current state? A common utopia is one of blueprints, where dissension is not tolerated. Transgressions are not allowed and will be punished. Why are we working long hours than before even though we are richer now. To many, utopias turn out into dystopias and nightmares. We crave freedom, but it some ways, it is an empty freedom. We spend too much on health care. The advertisers and mass media benefit from over consumption. This is the dystopia we are living in. We are pampered too much. We believed in big dreams in the past but we know that reality is very different. We are becoming more anxious over time. We are becoming more and more alike. There are other ways to progress other than via capitalism. Our utopia will start small and grow from there. Even though things are well, we need to constantly improve.

And the ad industry encourages us to spend money we don’t have on junk we don’t need in order to impress people we can’t stand. – Rutger Bregman

If success is a choice, then so is failure. Lost your job? You should have worked harder. Sick? You must not be leading a healthy lifestyle. Unhappy? Take a pill. – Rutger Bregman

Why We Should Give Free Money to Everyone. Feeding the homeless might be cheaper than locking them in jail or providing social services. One other way is to give them money. This is ironic, but it might work. How they spend it is up to them. The fact is that most of them were actually prudent in their spending. Some even used the money for personal growth. Giving money to them might be the most efficient way to help them. Free money doesn’t make people lazy. This has been proved by different studies. This has been proved in Namibia and Malawi. This might be superior to spending money on food etc. You have the freedom to buy want you need. This was already mentioned in Thomas More in his book in 1516. The dream is for all to have a universal basic income for everyone. Canada experimented with this idea in the 1970s. Mincome, a city in Canada, worked well under this model. There is a fear that people would be lazy if they didn’t work. There is little evidence that people would be lazy if they had a basic sum of money each month. President Nixon pushed for it in the past, but it often got rejected by the Senate. Many years back, democracy seemed a utopia, but it has worked. The benefit of giving people a basic income is that the poor can take on jobs which can give them growth. This should be the aim of capitalism.

Poverty is fundamentally about a lack of cash. It’s not about stupidity. You can’t pull yourself up by your bootstraps if you have no boots. – Joseph Hanlon

There is overwhelming evidence to suggest that the vast majority of people actually want to work, whether they need to or not. In fact, not having a job makes us deeply unhappy. – Rutger Bregman

So we have inspectors of inspectors and people making instruments for inspectors to inspect inspectors. The true business of people should be to go back to school and think about whatever it was they were thinking about before somebody came along and told them they had to earn a living. – Richard Buckminster Fuller

The End of Poverty. A new casino opened in 1997. It was Harrah’s Cherokee. It was run by Cherokee Indians. Organized crime did not increase. Those kids who grew up in poverty tended to have behavioral problems. Which was the cause, and which was the effect? Costello’s subjects who were lifted out of poverty had much lesser behavioral problems. Money from the casino earnings were given to needy families. The tribe ended up thriving after the casino earnings. Genes can’t be undone. Poverty can. Why do the poor tend to make dumb decisions? Poverty is something the individual has to overcome on their own. In economics, always everything revolves around scarcity. Poor people find food scarce, so they need to find an incredible way to make ends meet and that is a good thing. You can’t take a break from poverty. It’s all about the context. You can’t take a break from poverty, unlike a situation where you are busy at work. We all need to increase our gross domestic mental bandwidth. Getting out of poverty is more important than education. One solution is to give needy students a hand with financial aid paperwork. Does money enable you to be happy and healthy? Inequality is a big issue in modern society. Relative poverty is very important because like to compare themselves with others. Social mobility goes up when inequality goes up. Even rich people might not feel good if the inequality in their country is too high. Providing free apartments are also useful, as it helps to get homeless people off the streets. Homelessness can certainly be solved. We need to address the root cause, not the symptom.

Scarcity consumes you. You’re less able to focus on other things that are also important to you. – Eldar Shafir

The effect of poverty lowers your IQ by around 13 or 14 points. That’s comparable to losing a night’s sleep or the long term effects of alcohol. – Eldar Shafir

If you’d like to have more money, time, friends, or food, you’re more likely to experience a sense of scarcity. And the things you want are determined to a large extent by what people around you have. – Rutger Bregman

Poverty is a great enemy to human happiness; it certainly destroys liberty, and it makes some virtues impracticable, and others extremely difficult. – Samuel Johnson

The Bizarre Tale of President Nixon and His Basic Income Bill. Historians have more to give us. We should look and learn from history as much as possible. We shall look at Richard Nixon. He was forced to resign after the Watergate scandal in 1974. There were many who opposed his plan of giving free money to everyone. Anderson managed to change Nixon’s mind. The Speenhamland system failed badly in the 19th century England. Why did the President switch his mind? However, his message of wanting to fight laziness among the poor caused people to turn against the idea of basic income. Speenhamland appeared to be successful initially. In the fact, people were convinced that population growth will exceed food production. However, it was a disaster because of a few reasons. Marx believed that a revolution was needed to bring people out of poverty, not a basic income. Modern historians have realized that the results from Speenhamland might not be reliably measured. The consensus that the poor were becoming more lazy might be untrue. The Royal Commission Report changed Nixon’s decision. The truth of population growth indefinitely might not hold true. In 1834, the Speenhamland system was dismantled. The idea of a self-regulating market that will liberate the poor was still a dream. There are some scholars who believe that Speenhamland was a success. Things could have been handled so much better. The idea of a welfare state was hit badly as a result of Speenhamland. People who are poor only thing about the here and now and not the future.

The gross national product…measures everything…except that which makes life worthwhile. – Robert F. Kennedy

New Figures for a New Era. The Japan earthquake on Mar 11, 2011 wrecked havoc on the Japanese economy. However, the economy recovered miraculously fast. It had a silver lining for GDP. Rebuilding has a huge impetus for the government. However, we shouldn’t welcome these disasters. GDP does not measure the intangible benefits to society. It does not measure things like community service, clean air etc. Also, things like domestic workers are not measured in the GDP. Denmark has tried to quantify the value of breastfeeding in its GDP. GDP does not measure advances in technology. The higher the social problems, the more it will contribute to GDP. In the past, banks took up a huge slice of GDP due to their risk taking culture. Are we placing too much emphasis on GDP? Almost all politicians believe that growth is good for employment and the economy. The idea of GDP was already mooted in the 1800s. Adam Smith believed that those who worked in services industry produced nothing at all. Alfred Marshall realized that it was not so much the nature of products that mattered, but the price. However, accurate calculations on GDP only existed in the 1900s. It was essentially invented by a Russian professor named Simon Kuznets in 1932. It would be an excellent yardstick for any country. The GDP could give an overall picture of the economy. Even today, many professors do not understand how GDP works. GDP measures all the activity within its borders (including by foreign enterprises). GDP was very useful after a war. There are many other useful statistics that can serve us better than GDP. Today, the economy is so much more complicated than just some production numbers. In Bhutan, a gross national happiness index was suggested. Two possible candidates might be the Genuine Progress Indicator (GPI) or the Index of Sustainable Economic Welfare (ISEW). The wealthier a country is, the more difficult it is to measure that wealth. In Europe, the governments subsidize domains where productivity can’t be leveraged. The cost of health care is bound to increase. We will need indications to track life, eg. Community service, social cohesion, jobs, knowledge etc. We need to rethink how we relook at growth?

Productivity is for robots. Humans excel at wasting time, experimenting, playing, creating, and exploring. – Kevin Kelly


Great Thinkers by the School of Life (Part 2)

Political Theory

Karl Marx. We often dismiss Marxism. His ideas led to disastrous planned economies. He wanted private property to be abolished. Despite this, we should not dismiss him so easily. He joined the Communist Party, a bunch of intellectuals at that time. He wrote many books in his life. Marx realized that modern work was ‘alienated’. To love your job, you need ‘to see yourself in the object that you have created’. It should also allow us to improve. In the modern world, this doesn’t happen very often though. Modern work is too specialized. To him, humans are all born as generalists. We all have many desires as humans, not just to specialize in our work. If you feel your work is meaningless, you suffer. Our work has to address genuine needs or to help people. Some people’s jobs don’t have a long term effect to which to accumulate towards. Modern work is insecure because of advances in technology. However, most of us want stability. Communism guarantees that everyone has a job. Workers get paid little while capitalists get rich. The bosses get all the profit. Labourers will find it hard to change their circumstances. Workers, or the proletariat, could be easily exploited. Capitalism is very unstable. People are over-producing. Productivity has improved over the years. Marx thought that because of this, people should be happily unemployed. However, unemployment is frowned upon in society. Capitalism is bad for capitalists. Marriage was an extension of business. Because people cared too much about money, they could not put their hearts into their relationships. This is known was Warenfetischismus or commodity fetishism. Capitalism leads people to believe that with more money and belongings, people will be happier. It teaches us to be anxious, competitive, conformist etc. After he passed on, his writings were used for the ideological movements for the 20th century. We do need a more authentic relationship to money and consumption. We have to change the world.

John Ruskin. He cared a lot about beauty and wanted to remake the world into a beautiful place. He was a remarkable man. Ruskin had natural talent for art. Often, he would draw architectural buildings as well. Venice was the paradise to him. However, he was not so impressed with British urban life. He compared Venice with Britain and wondered how could Britain improve? He started his career as an art critic. As a career, he later attacked the principles of capitalism. This was done via speeches. After his dad passed away, he used the money to set up farms to create sustainable good sources. He created industry, schools, and museums. He started the Guild project, which was successful. He encouraged the rich to donate wealth to the Guild. Ruskin was a professor at the University and once got students to mend the road so that children could pay on them. It took a long time, but progress was made. Do not leave it to market forces. He was a man of his word and acted a lot. Be inspired by nature and look and appreciate it. We are part of nature and should use nature to energize us. Often, we dismiss thoughts as of having no significance. We should analyse such thoughts and understand them. Learn to see the good in society.

But the underlying point is crucial. Out of fear of seeming ridiculous, we often end up not tackling the challenges around us. The road mending was a small instance of a larger idea that animated Ruskin’s life: that it is the duty of creative, privileged people to direct their efforts towards making the world more pleasing and tidy, more convenient and beautiful, not just for themselves, but for the greatest good of the greatest number. – John Ruskin

Henry David Thoreau. He was an unemployed writer who lived in the woods. It is important to be simplistic and be authentic. He learnt about transcendentalism from Ralph Waldo Emerson and adopted it. He built a small cabin in the woods. The plan was to go there to write a book. He lived them and sucked out the marrow of life. In the woods, he discovered himself. Mankind doesn’t need a lot of things. Money doesn’t help us develop our soul and to him, work was unnecessary. He worked for only 1 day a week. He worked just long enough to fund his lifestyle. To him, sometimes we use other people to fill gaps in our inner life. One should aim to change oneself first. Technology was a distraction for him and encouraged others to remove it from their lives. Time was what was necessary to make people happy. He also found great beauty in nature. It also encourages introspection and self-discovery. To him, we needed to clear distractions from our minds. He encouraged civil disobedience in protest against immoral laws. He was the founder of the non-violent civil movement. One should be actively engaged with the world.

Matthew Arnold. Matthew was an educational reformer. Education would be a good tool. He was fond of higher ideals and fond of sweetness and light. Eventually, he became Professor of Poetry at Oxford. His famous work was ‘Culture and Anarchy’. There was very little love and care in the world, he noted. This was meant by anarchy. Money politics was growing and everyone was fond of riches. He predicted that culture would overcome anarchy. He wanted culture to be taught in schools and wanted art to govern societies. Art had the power to enable us to understand and clear confusion. The arts were only useful if everyone could understand it. Hence, there was a need to popularize it. He wanted a world where people were kind and exhibited sympathy towards one another.

William Morris. He understood the role of pleasure in work. Consumer demand has also played a huge role in modern society. Early on, he realized that money could not solve everything. He started off as an architect, but later wanted to be an artist and poet. He was keen of the medieval idea of craft to boost the economy. Workers could have to build a skill. Craft work is good because you are building something tangible. If people like their jobs, the issue of pay is less critical. You are no longer working just for the money. Labour was dignified. He started an arts business later in life. Industrialization brought about massive change and allowed for mass production. Would customers still be willing to pay for craft work? Consumers need to be educated. Everything in your house that you own should be beautiful. Items purchased should be seen as a form of investment. You can also pass it down to your future generations. He was conscious of the beauty of life. The economy is related to our preferences and choices.

John Rawls. What is truly unfair? He published ‘A Theory of Justice’ in 1971. He was a humble man who did a lot of social work and carried himself well. Life was not always fair and rag to riches stories are simply too rare. Imagine if you were not you. Those who are privileged seldom think of those who have suffered prejudice and suffering. Thus, there was a need to convince this group of people. He conducted ‘the veil of ignorance’ test. You wouldn’t know exactly what your life circumstances are. Your birth place is like a lottery. People need to know what needs to be fixed. His question allows people to think what a fair society is like. There is still a lot to be done to maintain this fairness.

As Rawls forcibly reminds us, in the modern United States, and many parts of Europe too, if you are born poor, the chances of you remaining poor (and dying young) are simply overwhelming and incontestable. – John Rawls

If we knew nothing about where we’d end up, what sort of a society would it feel safe to enter? In what kind of political system would it be rational and sane for us to take root – and accept the challenge laid down by the veil of ignorance? – John Rawls

Eastern Philosophy

He confronted suffering. He was known as Siddhartha Gautama. He was in a palace filled with luxury. When he was 30, he met the real world and saw ordinary people. He was touched by their plight. Finally he left the palace for good. He avoided all physical comforts and pleasures. Now, he developed a sense of compassion and peace. He reached ‘Nirvana’ or the ‘Awakening’. All of creation is united in its suffering. One shouldn’t bathe in luxury. It is best to live in moderation. There is constant suffering and dissatisfaction in the world. Suffering is caused by attachment due to our desires. Attachment is the root of suffering. We must change our outlook to life. Humans are not happy because we are greedy, vain, insecure. He suggested an eightfold path for humans to follow. Right view, right intention, right speech, right action, right livelihood, right effort, right mindfulness, and right concentration. Learn to develop a mindful attitude. The state of living was the most sacred issue. Do your best to liberate yourself from tyrannous desires.

Lao Tzu. He is a guiding figure in Daoism. He is rumoured to have wrote Tao Te Ching. The teachings are interwined with Confucianism and Buddhism. People are guided by the ‘Dao’. It opens life to multiple interpretations. It is the path to virtue, happiness and harmony. We resist the very simple path that will make us content. We must learn flow and the harmony of it. We need more time for stillness and to appreciate the world. Let your mind be still. Be in touch with your real self. We should pay more attention to the wonders of nature. He compares different parts of nature to different virtues. Trees are resilient and should be admired. Water is soft and gentle, but yet can be powerful when given time. Nature does not hurry yet everything is accomplished. Life is a series of small changes. Be content with what you want. Rejoice in the way things are. Learning the way of the Dao reminds you of stillness, openness and natural forces.

The idea that the contemplation of nature is a source of perspective and tranquillity is well known in theory, but so easy to overlook because we take it from granted and never give it the time and focus required. – Lao Tzu

Confucius. Confucius claims that he invented nothing. He led a virtuous life. He coined the golden rule. He understood the importance of ceremony. Rituals were powerful. Rituals teach people how to behave. Treat your parents with reverence. We should practise filial piety. Moral life begins in the family. Be obedient to honourable people. Be respectful to all around you. Cultivate knowledge more than creativity. Spend time to slowly change your habits.

Do not do to others what you do not want done to yourself – Confucius

We should obey our parents when we are young, care for them when they are old, mourn at length when they die and make sacrifices in their memory thereafter. – Confucius

Sen no Rikyu. He is one the greatest Zen thinkers. He stayed in the countryside and appreciate the Japanese tea ceremony. He believed in rituals too. Wabi-sabi means the appreciation of the imperfect. He made people realize the value of the authentic, for the un-decorated and the humble. The tea-house should be strong. The tea-house was meant to promote harmony. After the ceremony, one would be tranquil and peaceful. Make the spiritual life more tangible. There are co-relations between the big ideas and the small ideas.

Matsuo Basho. Poetry is good for our souls. Poetry was meant to guide us and bring wisdom and calm. He wrote in Haiku style. Old pond…A frog leaps in. Water’s sound. He was an exceptional poet. We should really appreciate life for what it is and be contented with our own company. Use natural scenes to remind his reader of flowers, weather etc. The transience of life makes every moment valuable. The lightness allows readers to escape the burdens of self.

St Benedict. We feel like we need to reinvent our lives. We are not involved in our community. Monasticism is where people are fruitful and they group together as friends towards a few big goals. One day, St Benedict went to the mountains. He had rules for everyone. There were rules for eating. One should avoid red meat and long chatter at dinner tables should be avoided. Silence was golden and was the key to concentration. Fashion was a huge source of interest to Benedict. Everyone should wear the same clothes and wear the same hair. Incorporate some physical activity in your life. Have early nights and sleep early. Do not have porn addiction. Learn to dress in a demure way. Admire beautiful art and architecture. Create a home which is uplifting and calming. He is showing us the potential for rules to help us live well. There is a lot of importance in having a strong community. One should live in such a way so as to avoid distractions. Communal life can be fun and we are better off joining a team.

Alexis de Tocqueville. We support democracy, although we can be disappointed by it. Alexis de Tocqueville studied the United States model. He believed in the power of democracy. He went there to see what the future would be like. During his trip, he talked to many people. There was an attitude of selfishness by the Native Americans. The Natives looked different from normal Americans. There were things to admire about America. To him, the wilderness was impressive. What were the social consequences of democracy? Democracy breeds materialism. This is because people believed that through hard work, you could amass a fortune. That is why people respect money. The test of a business is whether it can make money and be admirable. Capitalism led to people judging one another. Democracy breeds envy and shame. Poor people were looked down. Everyone believes that they have a good shot at life. People in the past, before democracy, were calmer. Democracy dismantled barriers to expectation. It was true that some of the poor might one day become rich. In aristocracies, servants accepted their fates with good grace. However, in democracies, they were ambitious. But the problem was that not all of them could achieve their goals, and if they couldn’t, they became bitter towards their masters and hated themselves for their inadequacies. Another issue of democracy was the tyranny of the majority. Majority could dominate the minority. Good ideas proposed by the minority could be shut down. Another problem was that democracy turns us against authority. Democracy was all for favour for equality, which was harmful in some ways. The issue was that people with no education could not understand why they were not on par with a doctor and disrespected authority. It was biased towards mediocrity. Democracy undermined the freedom of the mind. They did not speak up for their convictions, for fear of backlash. He showed us the pros and cons of democracy. He tried to get people strategically pessimistic.

I never met a citizen too poor to cast a glance of hope and envy toward the pleasures of the rich. – Tocqueville

Max Weber. He grew up seeing the Industrial Revolution. He was a young academic. Capitalism was possible because of a set of religious ideas. It was created by Protestantism. Protestantism makes you feel guilty all the time. God likes hard work. All work is holy. Work was also part of a religious vocation. It’s the community, not the family, that counts. There aren’t miracles. One needed to think methodically, act honestly and work industriously. The world bank should be giving Africa ideas instead of money. The economy requires cultural assistance. We need to look to changing mentalities, like Calvinism. How can we change the world? Bureaucracy is a major implication to change a nation. Removing the leader might only have a small impact. One cannot bring social change just by charisma. One way to overcome bureaucracy is through knowledge and systematic organization. Ideas might be important than tools to change nations. One can always change the thoughts in their heads.

Emile Durkheim (1858 to 1917). Capitalism makes us richer, but more suicidal too. He was fascinated by religion. Also, suicide rates were increasing among the educated people. Why were people becoming more unhappy? Individualism played a bigger role than community. Hence, it forces us to be masters of our destinies. When things go wrong, you only have to blame yourself. This is the burden of capitalism. It raises our hopes. Everyone thinks they can become the boss. Envy grows rife. Life is often quite simply painful and sad. Humans have too much freedom and that is not a good thing. There is nowhere to hide if you are not capable. Atheism was more common. Religion created bonds between groups of people. Capitalism weakens the nation and the family. Modern economies do not provide sufficient support and guidance for individuals.

Margaret Mead. She was a famous anthropologist. She eventually chose Christianity. The world was teeming with separate cultures. She travelled to Samoa for her field-work. She wanted to see that primitive cultures had their insights too. Naturally, she picked up the native languages and became popular. She led an unconventional life. The natives were comfortable with sex. There was less social expectations for them as to whether they could have sex etc. Modern Americans are forced to conform with societal norms. Our modern life does not allow us to be free. In different native cultures, women could be the more aggressive as compared to men. Culture has been big part to play in shaping personalities. Therefore, because of modern society, we have left some things behind. Humans are definitely moulded by society. We miss out on the greater opportunities in life. It is important to consider cultural norms and use them as guides for your emotional lives. Learn to study complex cultures. She was a supporter and fighter of many cause. We need to unleash and uncover human potential in our rush to modernity.

Theodor Adorno. He was a German. Eventually, he focused on philosophy. He wanted intellectuals to band together and change society. To him, capitalism was bad because leisure time was seen as being toxic. Leisure time should be used for expanding and developing ourselves. Hopefully, these cultural activities might have some impact on our lives. Modern entertainment keeps us distracted, and do not have the ability to alter political reality. It was like opium for the masses. The culture activities like to keep us distracted. Pop music focus on love. He thought that Walt Disney was the most dangerous man in America. To him, capitalism doesn’t sell us the things we need. We actually don’t get what we need but settle for less. We need calm, insight and tenderness etc. Advertising is mass manipulation. Politics needs to be changed via psychology too.

Adorno argued that leisure had a great purpose to serve: free time – and the cultural activities we might pursue in it – was our prime opportunity to expand and develop ourselves, to reach after our own better nature, and to acquire the tools with which to change society. – The School of Life

Rachel Carson. We have damaging the planet. She really cared for the environment and wanted to conserve it. She wrote books on sea life etc. She promoted identification with the world earth. We are all part of this beautiful Earth. DDT was controversial as it harmed wildlife. We should really try to leave nature alone. We should think more creatively about how to prevent insect damage. Good stewardship of the Earth is a must. Love is the key to transforming humanity’s relationship to nature.

Sigmund Freud. He was a vulnerable man inside. He invented psychoanalysis in 1900. However, he remained an unhappy man. He was jealous of Carl Jung. Humans are largely governed by the pleasure principle. Education teaches us to forgo short term pleasure but seek long term rewards. Life was full of neuroses. Childhood is the time when we adapt to reality. Later, children have to experience the ‘anal phase’, where they face the challenges of defecation. The next phase of a kid is when he has new sexual wishes. This nature of the child is repressed. Freud thinks that humans experience the Oedipus complex, where children direct their sexual impulses towards their parents. A child will tend to love her mother, but someone else will take away her attention. As a result, the child will hate the dad. To him, incestuous thoughts are at the back of the child’s mind. Humans have a difficulty associating sex with love. Freud thought that the cure for neurosis was psychoanalysis. Humans experience dreams which are exciting, but these are usually not practical in reality. Humor was a psychological survival mechanism.

Anna Freud. She was Sigmund’s daughter. She became a psychoanalyst when she grew up. Naturally, humans try to protect their egos. There are 10 key types of defence mechanisms. One is denial. This gets in the way of long-term coping. Projection is the next. We often project our own negative feelings to someone else. You can also turn against the self. Humans tend to regress and avoid commitment on big decisions to be made. A tantrum is a regressive defence mechanism. Humans often rationalize that we are innocent and nice and worthy. If one gets rejection for a job offer, one way to rationalize is that ‘it was a boring company’. This is the way to protect one’s self-esteem. Humans tend to use displacement, where people are angry with their bosses at work but do not express it and end up shouting at their wife at home. Fantasy is another escapist mechanism. These help you to escape from reality. Defences are not voluntary. Defence mechanisms play a big part in our lives.

Melanie Klein. She was also a psychoanalyst. Our desires are in a raw form. Deep down, we are governed by the pleasure principle. Sometimes, we fall prey to neuroses and inhibitions. We end up being uncreative in daily life. We might also end up failing. Klein analyzed children and how they played with toys. Children, when they grow up, start to realize what ambivalence is. As humans, we also learn to understand the ambivalent nature of all relationships.

Donald Winnicott. How do you build a better world? The way parents bring up children has a big impact on this. The right upbringing is absolutely key. He started off as a pediatrician. First, parents should remember that children are vulnerable. The early few months are immense work. Learn to let a child be angry. Make sure your child isn’t too compliant. This would lead to the child emerging to a ‘False Self’. These kids are not a proper good, but acting good only. Let your child be. Realize the gravity of the job you’ve taken on. Love is about the surrender of the ego, and putting aside one’s own needs and assumptions.

The foundation of the health of the human being is laid by you in the baby’s first weeks and months. Perhaps this thought can help a little when you feel strange at the temporary loss of your interest in world affairs… It is not surprising. You are engaged in founding the mental health of the next generation. – Donald Winnicott

John Bowlby. We all want to form stable relationships. Why is it so hard to establish such relationships? Relationship building is important as a child already. Children suffer when their parents are not good role models. Children need cuddling and playing too. Then, they will love their mother’s body. The ideal parent must be there. Most people do not get the required maternal care. Our parents behaviour might not be consistent. Those kids without good care entered 3 phrases: protest, despair and detachment. These are patterns of ‘anxious attachment’. Some kids are worse and they are ‘attachment avoidant’ and avoid warmth and even a hug because it seems dangerous. There are 3 kinds of attachments to other adults. They are 1) secure attachment. This is the best. This means that ‘you are slow to anger, quick to forgive and forget’. The next is anxious attachment. This is marked by clinginess and close checking on the other person.A small act can be seen as a huge threat. These type of relationships quickly become coercive and demanding. Some are avoidant attachments. This means you would rather walk away then get angry with the other person. People tend to a combination of a few traits. It is important to establish an early bond between mother and child. According to research, 56% are securely attached, 24% are avoidantly attached and 20% are anxiously attached.


The Economics Book (DK) (Part 3)

People are Not 100% Rational (Behavioral Economics). People sometimes make irrational decisions. They are affected by ‘whether they stand to gain or lose, and how the question is framed.’ Many are generally risk averse. However, in reality people are risk averse when they are winning and risk seeking when they are losing. How the question is framed also matters. This is where mass media can come in. The stages and outcomes in each stage also matter. Prospect theory in action. People place a lot more on things they already own. This is the ‘endowment effect’.

One may discover that the relative attractiveness of options varies when the same decision problem is framed in different ways. – Amos Tversky, Daniel Kahneman

Tax Cuts Can Increase the Tax Take (Taxation and Economic Incentives). In some cases, cutting taxes can result in government collecting more and not less money. Supply side economists believe that to improve the economy it is necessary to regulate less and free suppliers from high tax. Therefore, if the number of worked hours reduced outweighs the tax rate, then overall revenue will drop. There will exist a point where government will maximize revenue.

If a government takes no tax, it will get no revenue. If it takes 100% of tax, it will get no revenue wither, since no one will work. – Arthur Laffer

Prices Tell You Everything (Efficient Markets). Eugene Fama predicted that since markets are efficient, it is not possible to beat the market consistently. This is known as the EMH. Everyone has the same information. However, investors suffer from overconfidence and the ‘Herd’ instinct.

In an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value. – Eugene Fama

Over Time, Even the Selfish Cooperate with Others (Competition and Cooperation). Cooperation is beneficial most of the time. Would it to better to cooperate or to stay selfish? ‘Tit-for –tat’ strategy can work. Axelrod was the leader in this field. In reality, it was shown that cooperation can produce mutually beneficial outcome.

Most Cars Traded Will be Lemons (Market Uncertainty). The buyer has limited information and therefore is uncertain. He is unwilling to pay a high price for a second-hand good. Sellers withdraw their products, leaving only lemons behind. This is a failure of the market. Adverse selection is at work in the insurance market.

The Government’s Promises are Incredible (Independent Central Banks). Governments should avoid using discretionary policy but clear and simple ones. Discretionary policy will cause individuals to adjust their behavior. Modern individuals look forward, not just backwards. Discretionary policies can work when individuals are surprised. This is covered in one of the earlier chapter, on people’s rational expectations. The solution is to introduce independent central banks.

The Economy is Chaotic Even When Individuals are Not (Complexity and Chaos). This is the Lorenz’ effect or butterfly effect. ‘Tiny changes in initial conditions can cause large changes in outcomes.’ ‘No system yet discovered guarantees a good return in the stock market.’ The economic model is no longer simply linear. Complexity theory has been developed. The way individuals interact with each other, sometimes not rationally, causes the economy to seem complex and difficult to predict.

Social Networks Are a Kind of Capital (Social Capital). The initial definition of capital is physical capital or human capital. In modern times, there is now social capital. Social capital facilitate skills development and knowledge sharing. ‘Social Capital is now generally accepted as a significant element of economic performance.’

Education is Only a Signal of Ability (Signalling and Screening). A better level of education has a signaling function. Screening is when the buyer wants to find out more information from the seller by asking questions. Both signaling and screening happen all the time. ‘If person 1 has more information than person 2 in a transaction, person 1 is likely to send a signal to allow person 2 to make a more informed decision.’

The East Asian State Governs the Market (Asian Tiger Economies). It was long understood that for poor countries to emerge, the state needed to invest in infrastructure and industries. The five tigers, South Korea, Hong Kong, Singapore, Taiwan and Malaysia grew dramatically after WWII. By the 20th century, their standard of living was comparable to those in Europe. ‘East Asia miracle’. The governments shaped development by steering investment towards strategic industries. Shift from agriculture to manufacturing sector. They supported markets. Defence and Schooling helped correct market failures. Performance criteria was set as well. A few nations chose to lead markets, even those there was no competitive advantage initially. Initially, there is a need to resist private interests. ‘An authoritarian government that was responsible for promoting the private sector and exports.’

Beliefs can Trigger Currency Crises (Speculation and Currency Devaluation). A currency crisis is when one currency loses a lot of its value suddenly. This is usually caused when there is a large sell off, when many people withdraw funds. They are hard to predict. High inflation can also cause currency to devalue. Another way is when commodities devalue. When government policies are inconsistent with the exchange rate, it happens. An example includes printing too much money in a fiscal deficit. Shadow rate is what the exchange rate will be without government intervention. It is possible to speculate by buying all the foreign reserves of the country. The exchange rate will move from the shadow one to the fixed exchange rate. Currencies can collapse if they are pegged to another. It is also possible for crises to emerge without a speculative attack. Crises could also emerge if ‘banks borrow in foreign currency and lend in local currency.’ In the event of currency devaluation, they would be unable to pay. This makes it vulnerable to a speculative attack. The 3 main factors for currency collapse are when ‘foreign capital inflow is low, when central bank’s foreign currency reserves are low, and domestic credit growth is high.’

Auction Winners Pay Over the Odds (The Winner’s Curse). Usually, auction winner is the one with the highest bid over the true value. Since the actual value is actually the middle of the bids, the winner ends up paying more. There are three types ‘English auction’, ‘Dutch auction’ and ‘First price auction’. All 3 kinds yield the same revenue for the seller, this is known as ‘revenue equivalence theory’. It is optimal for bidders to bid below their valuations. This is called ‘shading’. There is one kind of auction, similar to the ‘first price auction’, that involves the winner only paying as much as the second-highest bid.

Stable Economies Contain the Seeds of Instability (Financial Crises). Crises are usually caused by excessive debt and falling prices. Institutions have a big role to play in a crises. Bankers try to innovate too much. The invention of CDO and CDS. It was getting harder for governments to control money supply. During times of growth, people become overconfident and take on more risks. There are speculative borrowers, who keep buying property and think the prices will go up forever. Know the idea of Ponzi schemes. The moment of the crisis, when the bubble bursts, is known as ‘Minsky moment’. When institutions stop lending to each other, the economy is in deep trouble. The central bank could act as the lender in the last resort. Second method would be to increase debt to stimulate the economy. The last would be to subject the market to further regulation.

Money is a veil behind which the action of real, economic forces is concealed. – Arthur Pigou

The peculiar behavioral attributes of a capitalist economy centre around the impact of finance upon system behavior. – Hyman Minsky

Businesses Pay More than the Market Wage (Incentives and Wages). Firms pay more than the market wage to get more from their employees. Because of moral hazard, employers can’t monitor employees all the time. This is the concept of ‘efficient wages’. Higher wages are associated with less turnover and better morale

Real Wages Rise During a Recession (Sticky Wages). Wages in real terms are ‘sticky’ and will respond slowly (in the long run) to change in market conditions. ‘Wage stickiness could coexist with rational individuals’. ‘Menu costs’ cause prices to be more sticky.

If you were going to turn to only one economist to understand the problem facing the economy, there is little doubt that the economist would be John Maynard Keynes. – Greg Mankiw

Finding a Job is Like Finding a Partner or a House (Searching and Matching). Finding a used product, a house etc is not easy and involves cost. ‘Individuals cannot search indefinitely, so they will work most effectively if they search within a range.’ When buyers and sellers can’t find each other, this is known as the ‘search theory’. In reality, there is a cost to searching. People should set a reservation wage and not accept anything below this. Once the wage offered is above this, they should accept it. A tiny cost involved in a search will lead to an increase in prices.

The Biggest Challenge For Collective Action is Climate Change (Economics and the Environment). The Kyoto Protocol was ratified in 1997. Burning of fossil fuels release CO2. Some argue that the costs of combating climate change is more damaging to economic prosperity. However, there are economists which calculate that it is beneficial to care for the environment in a GDP sense. Since the cost of pollution is deferred, some countries don’t care. Climate change affects everyone, therefore there is a need for collective action. Atmosphere is a public good. To combat climate change, emission policy is possible. However, it is difficult to find one policy that will solve everything. Taxing polluters is one way, so it tradable permits. Many have ratified the Kyoto Protocol but they can’t meet the targets in the Protocol.

Price-type approaches like harmonized taxes on carbon are powerful tools for coordinating policies and slowing global warming. – William Nordhaus

GDP Ignores Women (Gender and Economics). GDP is subject to problems. GDP measures goods bought and sold, but does not take into account depletion of natural resources, deforestation etc. Women who do housework are not counted in the GDP calculation, as it is not paid. Cooking to sell food is an economic activity, whereas cooking at home is not.

We women are visible and valuable to each other, and we must, now in our billions, proclaim that visibility and that worth. – Marilyn Waring

Comparative Advantage is an Accident. Producers attract other producers. Production has economies of scale. Once someone starts it first, has the first mover advantage, it is hard for other countries to compete.

Regions that for historical reason have a head start as centres of production will attract even more producers. – Paul Krugman

Like Steam, Computers have Revolutionized Economies (Technological Leaps). There are two kinds of technology, the first is general purpose and the second is specific purpose. General purpose is like electricity, where all can enjoy. Specific purpose is just limited to a certain industry.

We can Kick-start Poor Economies by Writing Off Debt (International Debt Relief). Rich countries should not lend to corrupt countries and should just write off the debt. The poor countries can’t pay anyway. IMF is an example of one which lends money to poor nations. The nation is technically not responsible as it is just a few corrupt individuals which are responsible. Austerity measures are passed in Europe, with no writing off of debt.

Pessimism Can Destroy Healthy Banks (Bank Runs). Even healthy banks can suffer. If banks have long term investments, they will have a liquidity problem when depositors withdraw funds. They will have to sell investments at a loss, causing a bank run. It is logical that banks will want to offer deposits. People’s expectations can manifest themselves into a self fulfilling prophecy. There are ways to prevent this. One is deposit insurance. Restricting people on withdrawing is another, so is depending on the central bank for bailout. Regulation can prevent moral hazard. In a bank run, only the first few depositors can get their money back.

A bank run in our model is caused by a shift in expectations, which could depend on almost anything. – Douglas Diamond; Philip Dybvig

In the history of modern capitalism, crises are the norm, not the exception. – Nouriel Roubini, Stephen Mihm

Savings Gluts Abroad Fuel Speculation At Home (Global Savings Imbalances). Ben Bernanke believed that the imbalance in savings and spending can cause crises. Deficits can be funded with funds from foreign investments, or by running down bank reserves. He believed that the Chinese saved too much, while the US was running a huge deficit. Countries with surpluses usually lend to others with deficits. He claimed that an excess of funds in the US caused people to not save and to spend more. Many have challenged his theory. Derivatives were at fault for the crisis. China likes to devalue its currency so as to make exports attractive.

More Equal Societies Grow Faster (Inequality and Growth). The widening income disparity, the more the poor will want the government to tax the rich and redistribute the wealth to them. More equal societies faster. Is taxation set to maximize government revenue or for pleasing the median person in society.

The greater the inequality of wealth and income, the higher the rate of taxation, and the lower growth. – Alberto Alesina; Dani Rodrik

Even Beneficial Economic Reforms Can Fail (Resisting Economic Change). Reform is difficult and nobody likes it. It is even harder if the government is corrupt. Corrupted governments will come up with policies to redistribute the wealth among themselves. Reforms are effective in clean governments. However, the citizens might reject and vote the party in power out.

The Housing Market Mirrors Boom and Bust (Housing and the Economic Cycle). Boom and bust is usually over 3 to 7 years. Housing prices has a lag effect, they do not respond so quickly to a drop in demand. A decline in demand for housing is a sign of recession. When people believe that their housing price will rise, this signals recovery. Based on housing prices, it is possible to predict when a recession will strike. However, in 2008, it was clear that a housing bubble burst.


The Economics Book (DK) (Part 2)

Protestantism has Made Us Rich (Religion and the Economy). Recent research has reflected that Protestantism has no effect on economic growth. Protestants believe in hard work and frugality as they believe it will lead to salvation. The money earned will be reinvested in the future and grow the economy. Religion might make a difference to the wealth of nations.

The Poor are Unlucky, Not Bad (The Poverty Problem). A lot of things are out of one’s control. Such as property prices, education costs, job prospects etc. Therefore, the poor are just unlucky. The question is whether the poor should be given handouts. John Stuart Mill believed the State should intervene and help those truly in need. Amartya Sen believed that ‘poverty is about limitations in capabilities and functioning’ Extreme poverty is defined as earning less than $2 a day.

Socialism is the Abolition of Rational Economy (Central Planning). Marx believed in socialism. This means state ownership of production and limiting competition. This involved heavy central planning. Without competition, there is little information or incentive for efficient production. Therefore, this is in direct conflict with capitalism. The state decides on the prices of things. However, it is very difficult to determine this. Money is less important in Socialism. However, if you derive values of products from their labor costs. It is not the true market price. Central planning committee has to decide what goods people want so that the factories can produce them. Some argue that only the free market can provide the right incentives and information. The Socialist system in Russia collapsed.

In the socialist commonwealth, every economic change becomes an undertaking whose success can be neither appraised in advance nor later retrospectively determined. There is only groping in the dark. – Ludwig von Mises

Capitalism Destroys the Old and Creates The New (Creative Destruction). People seek new markets and new profits through innovation. This will lead to certain emerging industries and certain sunset industries. This concept was coined by Joseph Schumpeter. Entrepreneurs are the big driver of this. There are two types of technological innovations ‘Sustaining’ and ‘Disruptive’.

New products and new methods compete with the old, not on equal terms but at a decisive advantage that may mean death to the latter. – Joseph Schumpeter

War and Depressions (1929 to 1945). Economics is the ‘science of scarce resources’. After a crisis, an economic stimulus is needed. Keynes believed in government spending to get out of a recession. By controlling money supply and public spending, it was possible to kick start the economy. Economics had two branches, microeconomics and macroeconomics. After Keynes in the 1930s, people began to fall back on the free market.

Unemployment is not a Choice (Depressions and Unemployment). People used to think unemployment was a choice as people had too high wage expectations. As prices fall, value of wages rise, therefore, there is a need to retrench people. People are thus trapped in unemployment and firms are under producing. In 1936, Keynes published his most important work. In modern times, unemployment remains a problem. Unemployment is not just a problem with individuals. It is a problem with the economy. This is known as ‘involuntary unemployment’. Even a free market will not return the market to equilibrium easily. One way to solve unemployment is to force people to take a pay cut. However, not many in reality will accept this. This is not a realistic solution. He believed in fiscal stimulus and it doesn’t matter how. The ISLM model is very popular nowadays. Many people don’t want their wage to fall as they are constantly comparing themselves with their peers.

The sooner involuntary unemployment is disposed with, the better. – Robert Lucas

The treasury could fill old bottles with banknotes and bury them…and leave it to private enterprises on well-tried principles of laissez-faire to dig the notes up again. – John Maynard Keynes

The difficulty lies not in the new ideas but in escaping from the old ones. – John Maynard Keynes

Some People Love Risk, Other Avoid It (Risk and Uncertainty). People don’t just make decisions on probability. Risk averse people tend to have lower returns and risk seeking people tend to have higher returns. In order to attract people to take on risk, you need to provide higher returns. Risk is different from uncertainty. Uncertainty is when you don’t know the outcomes.

Profit arises out of the inherent, absolute unpredictability of things. – Frank Knight

Government Spending Boosts the Economy by More than What is Spent (The Keynesian Multiplier). Government Spending will create employment. The workers will then spend more, creating even more employment. Keynes was a strong advocate of government spending. A standard estimate is that every $1 of government spending might create an increase in income of $1.40 through these secondary effects. ISLM (Investment, Savings, the demand for Liquidity, and the Money Supply).

Besides the primary employment created by the initial public works expenditures, there would be additional indirect employment. – Don Patinkin

Economies are Embedded in Culture (Economics and Tradition). It is a common belief that people are rational. However, Karl Polanyi countered this why saying is that culture drives economic life. People desire status in society and therefore work hard in getting there. An example of his theory in action is in the Trobriand Island tribe. He didn’t believe that markets and social structures could exist harmoniously.

The economic system is, in effect, a mere function of social organization. – Karl Polanyi

Managers go for Perks, Not Their Firm’s Profits (Corporate Governance). Not all companies are run in the best interests of their shareholders. Nowadays, management have a huge say in how a company is run. Also, the problem stems from passive shareholders. Berle and Gardiner founded the modern corporate governance. This is to ensure that management acts in the interest of shareholders. However, in the 2008 financial crisis, corporate governance failed.

The Economy is a Predictable Machine (Testing Economic Theories). Econometrics is the testing of economic variables through mathematical means. However, past performance is no guarantee for future performance. There are many variables to consider.

Intermediate between mathematics, statistics, and economics we find a new discipline which…may be called econometrics. – Ragnar Frisch

Economics is the Science of Scarce Resources (Definitions of Economics). Scarcity forces economic choices. ‘Science of human actions in the face of limited resources with multiple uses.’ ‘Human needs are infinite, yet there are only a finite amount of resources.’ This definition has been wider accepted.

We Wish to Preserve a Free Society (Economic Liberalism). Prices should reflect total market information and governments should aim to protect that. Friedrich Hayek was a very influential economist. He didn’t governments had the ability to shape society. He was right when those states with planned economies would head to a totalitarian state. Some economists defended Socialism. Hayek argued that all individuals were very sure of what they were doing and market had imperfections. He believed in the free market. The government should intervene only to restore the market to its free market state. Therefore, the state should only have a limited role.

The more the state ‘plans’, the more difficult planning becomes for the individual. – Friedrich Hayek

Industrialization Creates Sustained Growth (The Emergence of Modern Economies). More people work in cities, obtaining a higher level of skill and education. This leads to cultural change and business growth. Future generations will also enjoy this. Simon Kuznets created this idea. He saw that factories will take over farms one day. Industrial Revolution helped Britain in the 18th Century. In modern society, there is now a move to the service sector.

Different Prices to Different People (Price Discrimination). Price discrimination is possible even in markets with only a few firms. Firms want to charge according to how much each customer is willing to pay. There are generally three types of pricing models. The first to charge each customer the maximum he/she is willing to pay. The second is to reduce the price for each additional unit sold. The last is to identify different customer groups and charge each group accordingly. This might allow people like students to benefit as they can now afford to watch a movie.

Price discrimination is the act of selling the same article produced under single control at a different prices to the different buyers. – Joan Robinson

Post War Economics (1945 to 1970). It was a difficult time for economies to rebuild. The UN was formed in 1945. Keynes was lauded for his emphasis on fiscal policy when there is an economic crisis. However, Asia and Russia did not fair so well. The impossibility theorem shows that there is no perfect voting system. Perhaps a country’s growth can be measured by other factors.

In the Wake of War and Depression, Nations Must Cooperate (International Trade and Bretton Woods). Gold initially backed paper money. After the Great Depression, many tried to devalue their currency, making exports more attractive. Restrictions on trade only help to prolong the Depression. In 1944, delegates agreed to peg currency against USD. This was governed by the IMF, where they could distribute emergency funds. In 1971, President Nixon suspended the dollar-gold link (Bretton Woods system). There is a need for nations to cooperate and open trading doors to others in times of crisis.

All Poor Countries Need Is a Big Push (Development Economics). Poor countries require investments in infrastructure and industry simultaneously. Only governments can afford to do this, not corporations. Poor countries need a big push. Massive capital injections are necessary. Infrastructure and Factories are 1 set. You need both for the economy to start going. Many industries are linked to another. When one does well, the other might or might not do well also. Thus, it is possible to go from nothing to everything. It is hard for private enterprises to drive this. Governments need good knowledge of the forward/backward industries. A good state should not allow too much government intervention. The UN offers aid to developing countries.

Most industries catering for mass consumption are complementary in the sense that they provide a market for, and thus support, each other. – Ragnar Nurkse

People are influenced by Irrelevant Alternatives (Irrational Decision-Making). In theory, people make decisions based on probability. However, research has proven that people switch irrationally to other products. Maurice Allais didn’t believe people sought the greatest utility as this is based on assumption and choices are often co-related. ‘The violation of independence takes place in situations of uncertainty.’ People often violate the independence axiom. People generally like alternatives.

Governments Should Do Nothing but Control the Money Supply (Monetarist Policy). Keynes didn’t believe in controlling the money supply. However, Milton Friedman believed that controlling the money supply will work. Money will affect output in the short run and prices in the long run. The failure for people to spend in a recession prolongs it. The problem of state intervention to reduce unemployment led to high inflation. He claims that fiscal stimulus causes inflation and should be avoided. ‘Money should grow at a modest, constant rate in order to keep inflation low.’ He believed in the short run that output will increase in the short run and in the long run prices will increase. Inflation and unemployment is governed along the Philips Curve. There is such a trade-off. However, there is a natural rate of unemployment. Some argue that people e predict government’s plans and therefore in the short run, the Philips Curve is vertical. It is possible for both unemployment and inflation to increase together. This is known as stagflation. Nowadays, monetary supply is controlled, as is fiscal policy. In the 1990s, countries used exchange rate or change interest rates to impact inflation.

The More People in Work, The Higher their Bills (Inflation and Unemployment). There was research that reflected periods of high inflation coincided with low unemployment. Governments could pick their point on the Philips Curve. However, in the 1970s, both unemployment and inflation moved together. The Philips Curve did not take into account people’s expectations of inflation. According to him, there is no trade off. There is only a natural rate of unemployment in every economy.

People Smooth Consumption Over their Life Spans (Saving to Spend). People save money and take into account their lifetime income when spending. When government spending increases, people’s spending increases by a multiplier of that. However, in reality, ‘the ratio between household consumption and income over the long run turned out to be stable.’ Individuals anticipated how much people they needed in the future and started to save. People save when they are young, spend when they are old. This is the life-cycle hypothesis.

‘Permanent income hypothesis’. ‘Successive generations seem to be less and less thrifty. – Franco Modigliani

Institutions Matter (Institutions in Economics). Some economists investigate the role of institutions in the State. They are important as they set the laws, customs and traditions of a society. People tend to follow them. Tension is rooted in colonial origins. When institutions degenerate, problems start for the economy.

People Will Shirk If They Can (Market Information and Incentives). Banking bailouts are moral hazards. When no one is watching, people put in less effort. This is because actions are hidden from the other party. This is known as ‘moral hazard’. Principal can’t monitor the agent all the time. Wording the contract in a certain way might prevent this from happening. Banks who think they are too big to fail might keep thinking that the government will bail them out. This causes them to take on excessive risk.

Theories about Market Efficiency Require Many Assumptions (Markets and Social Outcomes). Market efficiency requires assumptions that price completely reflect customer preferences etc. Walras believed that markets, without intervention, can reach a stable equilibrium. Only under certain conditions could a set of markets remain in equilibrium. The first welfare theorem states that ‘any pure free-market economy in equilibrium is necessary ‘Pareto efficient’. The second welfare theorem states that ‘any of these Pareto- efficient distributions can be achieved using free markets.’ Using a Contract Curve. For the theories to hold, people need to rational and respond to market signals. There cannot be externalities or economics of scale.

An allocation of resources could be efficient in a Pareto sense and yet yield enormous riches to some and dire poverty to others. – Kenneth Arrow

There is no Perfect Voting System (Social Choice Theory). To evaluate the well-being of a society, values of individual members need to be taken into account. There must exist a system for them to state their preferences. ‘It is impossible to devise a voting system that truly reflects the preferences of an electorate’. Some prefer A to B, and B to C, but also C to A. With an ideal voting system, it is not possible to satisfy all the assumptions, one being that there should be no dictator. Arrow’s theorem is now being widely applied in society.

The Aim is to Maximize Happiness, Not Income (The Economics of Happiness). Joblessness is a main course of unhappiness. In the 1930s, GDP calculations came about. Rising GDP meant increasing wages and jobs, falling GDP means unemployment. However, there is little correlation between GDP and real social welfare. High GDP could lead to widening income disparity. People in richest countries need not seem the happiest. The concept of the ‘hedonic treadmill’ was introduced. ‘Keeping up with the neighbours’. In modern times, different indicators have emerged.

Economic things matter only in so far as they make people happier. – Andrew Oswald

Policies to Correct Markets Can Make Things Worse (The Theory of the Second Best). The real market consists of many distortions which are linked. Correcting one might worsen others. Governments need to act with caution. In some cases, there are no best solutions and distortions can be permanent, thus one has to rely on second best solutions. Sometimes, it is better to leave an imperfection alone rather than interfering.

Make Markets Fair (The Social Market Economy). The Social market was perceived to be fair as it ensured the equal distribution of wealth. Armack believed in the government playing a minimal in the economy. Industry will remain in private ownership but the government will provide several public goods, including pension and taking care of unemployment. Many of the European countries thrived under the social market system. China’s economy is now a ‘socialist market economy with Chinese characteristics’.

Over Time, all Countries Will be Rich (Economic Growth Theories). Poor countries can reinvest their capital into machinery/infrastructure that can increase output to a larger extent than rich countries. This is known as convergence, over time all countries will be rich. This is basically poor countries can grow quickly and catch up. However, Solow’s theory does not hold true in reality. There is little evidence supporting Solow’s theory.

Globalization is not Inevitable (Market Integration). It is the integration of markets. Government’s policies can hinder market integration (fusing many into one). Price differences between different countries are eliminated. Easier transportation contributed to this. Most tariffs have been scrapped. Institutional rules also hinder markets. Dani Rodrik was against ‘deep integration’. Market integration, democracy, and sovereign nation states cannot co-exist. Only two out of the 3 can co-exist. There would be no sovereign nation states should the institutions have to change. Democracy will be affected as well. In modern times, countries avoid deep integration and still keep their institutional rules. Globalization is not all good as well.

Socialism Leads to Empty Shops (Shortages in Planned Economies). The state protects shops from bankruptcy. Therefore, firms do not bother about costs. Therefore, ‘Socialism leads to empty shops.’ Planned economies could not produce enough at the correct quantity. Concept of ‘soft budget constraints’ and ‘hard budget constraints’. Firms had little incentive to supply goods and services efficiently. Kornal argued that the ‘soft budget constraint’ was a feature of the planned economy. Even the major European and US banks were in the ‘soft budget constraint’ category as they feel that they can be bailed out. Even in a free market economy, there are both ‘soft budget constraints’ and ‘hard budget constraints’.

What Does the Other Man Think I Am Going To Do? (Game Theory). ‘Minimax rule’ is to minimize the maximum loss on any turn. Cournot, in 1938, started analyzing the issue of game theory. Game theory is the strategy in which people behave in every situation. People sometimes have to make independent decisions in non-cooperative situations. People will select their best strategy based on the fact that opponents are also selecting their best strategy. ‘Each player’s strategy is optimal against those of the others.’ This is the Nash equilibrium. However, when this strategy is employed, it is often not the optimal result for the group. Therefore, it is better to co-operate. People suffer from bounded rationality.

You know what you are thinking, but you do not know why you are thinking it. – Reinhard Selten

Rich Countries Impoverish the Poor (Dependency Theory). Rich countries exploit free trade by trading with poor countries on terms that favor them. The rich get richer, the poor get poorer. This is known as the ‘dependency theory’. The rich set their own terms and make it favorable for themselves. However, some developing countries isolate themselves and instead, choose to trade among other developing countries.

You Can’t Fool the People (Rational Expectations). Keynes model fails to take into account people’s expectations. Fiscal policies only work in the short run. People anticipate effects of government fiscal policy. They will predict future prices based on an economic, rational model in their heads. Government can take people by surprise in the short run. Under rational expectations, ‘Unemployment is determined by the productive capacities of the economy: the productivity and technological capacities of its firms and the efficiency of its markets. Policy makers cannot boost the economy beyond this level of employment.’ Lucas believed in modelling based on people’s preferences.

People Don’t Care About Probability When They Choose. Humans seek to boost their expected utility. However, people tend to ignore probabilities. People prefer the ‘known unknowns’ to the ‘unknown unknowns’. They show a preference for known odds. ‘People want to know more about the unknown, unquantifiable risks that expected utility cannot account for.’

Similar Economies Can Benefit From a Single Currency (Exchange Rates and Currencies). Some believe in the free floating exchange rate. After WWII, the Bretton Woods system was based on a fixed exchange rate system. However, this led to a balance of payment system (between imports and exports). In Europe, they adopted the floating exchange rate system. If countries are of similar size and growth, they can choose to adopt the same currency as it will eliminate foreign exchange gain/losses. It is not realistic to have a global currency as well. A country with its own currency can control money supply and interest rates. The Euro was an example of a common currency. However, there was certain criteria for countries to meet before they could enter the EU. ‘National debt cannot exceed 60% of GDP and annual deficit cannot exceed 3% of GDP.’ The ECB is now the common central bank. However, risk sharing through transfer of tax revenues did not occur. Individual countries could still set their spending and tax levels. Within the Euro area, massive differences emerged. Some countries had huge deficits, while some had huge surpluses. This led to a few nations requiring bailout, including Greece. There is debate whether a common currency is the best thing for the Eurozone. Even fiscal transfers need political consensus.

Famine Can Happen in Good Harvests (Entitlement Theory). Famine can occur even there is a surplus of food, especially when wages have plunged. The way food is distributed also causes a problem. ‘It is far more common for food supplies to be unavailable to those who need them the most.’ Food price rising also is a major issue that needs to be addressed. Amartya Sen is a major contributor in this field

Contemporary Economics (1970 to present). Friedman opposed Keynesian ideas and believed in controlling inflation. He also believed in the free market. This marked the period of the deregulation of financial institutions. Liberalization of markets. Capitalism did not fair well during the crisis and some were even starting to believe in Marxism. The Laffer Curve.

It is Possible to Invest Without Risk (Financial Engineering). VAR was introduced, so was CAPM. Countries were experiencing inflation in the 1970s and the US experienced trade deficits. Restrictions on the CME was lifted in 1972. Forward and futures contracts emerged. Derivatives were invented to hedge positions. It also provides high leverage. Derivatives contracts were soon traded on the exchange. Cash settled derivatives were very risky, as there was no need to exchange the underlying. It was hard to price derivatives until the Black-Scholes model emerged. There should be a no arbitrage rule. In 2008, the financial markets collapsed in spectacular fashion.


The Economics Book (DK) (Part 1)

The book serves to give a better understanding on economics theories. The power of economics is felt everywhere. Economics is what moves countries. It is not just about numbers and graphs/charts. The subject is more of an art than science as it is driven by the rational/irrational behavior of humans. ‘The Wealth of Nations’ by Adam Smith in 1776 kicked start modern economics. Soon came the market economy. This is generated separated into macroeconomics and microeconomics. A hands off approach is known as laissez-faire. Others such as Karl Marx believed in state intervention. Neoclassical economics occurred in the 19th century. There are many other schools of thought now.

In economics, hope and faith coexist with great scientific pretension and also a deep desire for respectability. – John Kenneth Galbraith

The first lesson of economics is scarcity: there is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregards the first lesson of economics. – Thomas Sowell

Economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing. – Steven D Levitt

Let Trading Begin (400BCE to 1770 CE). Trading, even barter trading occurred a long time ago. Plato and Aristotle wanted to come up with a normative (moral implications) approach on an economy. In the 15th century, governments started to monitor fiscal surplus/deficits, imports/exports, taxes. In the 17th century, the stock exchange was established. In the 18th century, economics became a lot more scientific. This was when the macro-economy was born.

Property Should Be Private (Property Rights). Aristotle believes that private property will give people the incentive to trade and get rich. There are three different beliefs here. The first is that everything is common and that everyone can use them. The second is that the property be held and used collectively. The third is that property is private and that people can do as they choose. 3 reasons against public property (no one will maintain it, people have little incentive to trade, people will be selfish). Government can take over private property as well but usually the home owner will be compensated with the market price.

It is clearly better than property should be private, but the use of it common; and the special business of the legislator is to create in men this benevolent disposition. – Aristotle

What Is A Just Price? (Markets and Morality). Some believe that prices are a function of supply and demand. In the past, it is believed that sellers get to fix their prices. The moral issue is that the seller gets excessive profits and deceive customers. Thomas Aquinas believed in a ‘just price’ setting. There are different views to this, depending on whether you are for government intervention.

No man should sell a thing to another man for more than its worth. – Thomas Aquinas

You Don’t Need to Barter When You Have Coins (The Function of Money). Kublai Khan used money in the 13th century. Money is ever-present in today’s society. It is hard for barter to work in the long term. ‘Money is transferable and deferrable’. There are two types of money: commodity (example gold coins) and fiat money (paper money).

Make Money from Money (Financial Services). It started off from the Medici family in the 14th century. The initial tools were to finance trade in commodities. The next was to open many branches, managed by different partners. The last was to accept customer deposits. Long ago, banks already dealt in foreign currencies. The economics of banking include lending wisely, gathering deposits, spreading risks to earn economics of scale. Banks must be careful to avoid ‘a run on the bank’ situation. Bills of exchange were developed to guarantee delivery of goods. Derivatives brought about the financial crisis of 2008. Banks engage in ‘network externalities’, meaning that they collaborate with each other to get more information. Co-operatives started (example is Grameen Bank, Rabobank). Bank failures can have serious implications on the economy. That is why regulation is in place to prevent them from going under.

A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain. – Mark Twain

Money Causes Inflation (The Quantity Theory of Money). Jean Bodin came up with this idea. An increase in money supply increases inflation levels. This is because as people become richer, there is too much money circulating and not enough goods, leading to inflation. Real and nominal side of the economy emerged. People chase ‘real money’, not ‘nominal money’. MV=PT ‘P is the price level’; ‘T is the transactions that take place’; ‘M is the supply of money’; ‘V is the velocity of money (a constant)’. However, recent research has proven that velocity is not constant. V affects output and employment. A rise in interest rates will lead to rise in V. Quantitative easing is when central banks print money and buy government debt. This helps to reduce interest rates.

Inflation is always and everywhere a monetary phenomenon. – Milton Friedman

Protect Us From Foreign Goods (Protectionism and Trade). Limiting import of goods causes more money to be retained in an economy. Some believe in a free market, some believe in protectionism. There was causing that money outflow will lead to currency devaluation. Thomas Mun concluded that how the trade and payments balance out matters. His idea was to import and then value-add on the product before exporting it. Adam Smith believed the wealth of all nations as a whole mattered. Nowadays, many people believe in free trade. Hence, the FTAs signed between countries. Protectionism is quite rare nowadays.

The Economy Can Be Counted (Measuring Wealth). William Petty attempted to measure national income and GDP. He wanted to quantify different countries’ performances. GDP is the total value of all the goods and services exchanged for money within a country in a particular period. Other indicators have emerged, such as GPI (Genuine Progess Indicator), HPI (Happy Planet Index).

Let Firms be Traded (Public Companies). The purpose of the stock market was for more efficient capital allocation and diversification of risk. The East India Company was one such example.

Wealth Comes from the Land (Agriculture in the Economy). Wealth stems from production and the output of the farmer. Manufacturing can also produce surpluses. Theodore Schultz also believed in the power of agricultural development, especially in poor countries. Henry George believed that land should be held in common. However, Adam Smith believed more in labour than in land.

If we knew the economics of agriculture we would know much of the economics of being poor. – Theodore Schultz

Money and Goods Flow Between the Producers and Consumers (The Circular Flow of the Economy). The circulation of money is very important. The ‘multiplier effect’ was introduced in the economy. That is why government stimulus package is crucial. Quesnay believed in low tax and investing in equipment to generate more money. Macroeconomic performance via income accounting was born (income and expenditure flow). The classical model focuses on three factors: land, labor, and capital.

Private Individuals Never Pay for Street Lights (Provision of Public Goods and Services). Public good (hard to prevent someone from benefitting, by enjoying it you can’t diminish someone’s else enjoyment, can’t stop non-payers from using them). Government has to step in to provide these. Problem of ‘free-riding’. Non-excludability and non-rivalry.

Where the riches are engrossed by a few, these must contribute very largely to the supplying of the public necessities. – David Hume

The Age of Reason (1770 to 1820). A fresh approach of looking at the economy was needed. Adam Smith was central to this development. He believed in a free market, capitalism, with a limited role for the state. This was also the period of Industrial Revolution. David Ricardo was also very influential. He showed how less productive countries could benefit from free trade. The relationship between supply and demand was established.

Man is a Cold, Rational Calculator (Economic Man). Individuals are all self-interested and want to maximize well-being. Yet, they want to minimize cost in achieving the above. Cost-benefit analysis. People are rational. This is how behavioral economics comes about.

The Invisible Hand of The Market Brings Order (Free-Market Economics). Man, even without his knowledge, acts in the wider interests of society. This is known as laissez-faire (leave business alone) economics. When demand for a product exceeds supply, people will bid up the price. Suppliers will see this opportunity and compete to supply more products. This will eventually reach equilibrium. Same works for employment: also based on the invisible hand. However, recent criticisms to his theory is that market might only produce products for the rich and fair prices may change in times of scarcity. Innovation and competition can help lower prices. Consumption is the sole end and purpose of all production’ – Adam Smith. There are two types of labor ‘productive’ and ‘unproductive’. Division of labor results as there are more specializations. As there is more capital, there can be more savings in the economy. Later on, neoclassical economics emerged. Maths was used to seek a solution on how prices can reach equilibrium. Keynesian economics believed in government intervention. This debate has carried on till today.

The Last Worker Adds Less to Output than the First (Diminishing Returns). This is the diminishing marginal returns theory. It explains not only why it costs more to produce more, but also why countries struggle to get richer if their population expands without improvements in technology.

The earth’s fertility resembles a spring that is being pressed downwards where the effect of additional weights will gradually diminish. – A R J Turgot

Why do Diamonds Cost More Than Water? (The Paradox of Value). Hardly anything can be exchanged for water. However, a diamond doesn’t serve much uses but is worth a lot as it is in limited supply. Diminishing marginal utility. Water is abundant, but diamonds are scarce. One extra diamond has a high marginal utility and so commands a much higher price than an extra cup of water.

Make Taxes Fair and Efficient (The Tax Burden). Tax allows the transfer of happiness from one group to another. Efficiency means both effectiveness in collection and maximizing tax revenues. Fairness needs to be taken into account when designing a policy. In the past, people believed that only agriculture was value adding. Modern tax suggests final tax to goods sold to customers. Taxation on market failures is also common.

Divide Up Pin Production, and you get More Pins (The Division of Labour). Focusing on a task can mean more speed and skill. Therefore, leading to higher productivity. Although a division of labour might lead to poor job satisfaction. It is good to specialize in something. Nowadays, companies like to outsource certain parts of the process.

Every expansion of the personal division of labour brings advantages to all who take part in it. – Ludwig von Mises

Population Growth Keeps Us Poor (Demographics and Economics). Thomas Malthus argued that population growth puts a strain on resources. Social and economic reforms are very common. ‘Mathusian trap: higher living standards are always choked off by population growth.’ However, this is not true in modern society. People are becoming increasingly affluent. Technology and productivity has improved, leading to better standards of living.

Meetings of Merchants End In Conspiracies to Raise Prices (Cartels and Collusion). Competition drives down prices. Monopolies set prices by restricting output. Oligopoly is when a few suppliers collude. This is how cartels are formed. It is possible to use legislation like anti-trust laws to counter this. Small cartels are easier to manage. There is the possibility of self-interest in a cartel. A famous cartel is the OPEC. There is usually an enforcer in a cartel. Cartels are not common as it is hard to maintain.

Economists have their glories, but I do not believe that antitrust law is one of them. – George Stigler

Supply Creates its Own Demand (Gluts in Markets). Jean-Baptiste Say didn’t believe it was possible to over produce. Once a product is made, it creates a market for other products. This is the flow of money. People will have to spend the money that they eventually earn. ‘Supply creates its own demand’. Overproduction is very rare. On the other hand, Keynes believes that growth only comes with increased demand. He believed that if people saved money, it would no longer be in circulation. This would lead to a decrease in demand for goods, causing unemployment.

Borrow Now, Tax Later (Borrowing and Debt). It makes no difference whether the government borrows or taxes now. Borrowing is deferred tax. People are indifferent to the method used. This is the Ricardian equivalence (debt neutrality). The modern debate is that borrowing and taxes occur at different rates and timing. Life expectancy matters as well. It predicts that if government uses fiscal stimulus measures and spend more now, the people will receive heavy tax in the future. Therefore, people are indifferent now. This is not true. ‘There is a limit to which governments can borrow and tax’.

The Economy is a Yo-Yo (Boom and Bust). Under consumption and over production are the causes of economic turbulence. The economy is cyclical in nature. How to fuel the boom. People will get richer during a boom. However, when the supply exceeds demand then it will force companies to cut prices. This will lead to a downturn. Government intervention can help cool a heated economy.

Universal competition or the effort to always produce more, and always at a lower price…has been a dangerous system. – Jean-Charles Sismondi

Trade is Beneficial for all (Comparative Advantage). Time is essential. Make what you are good at doing best only. The others will make the reminder of the products. Then trade to exchange these goods. Setting price floors and restricting imports lead to deadweight losses. You will profit by doing what you are best at. Whether you are capital intensive or labor intensive, you will have an edge if you trade. Protectionism normally doesn’t work. It appears that those countries which have cut tariffs have achieved better growth.

Industrial and Economic Revolutions (1820 to 1929). Capitalism started. There was a shift from agriculture to industralisation. The supply and demand curve was developed. Marx believed in less of a market economy, but rather one where production is owned by workers and there was no private property.

How Much Should I Produce, Given The Competition? (Effects of Limited Competition). Duelling duopolies. The Nash equilibrium is making an optimal decision when you not know what the opponent will do or react. This is an example of game theory. The optimal output for a duopoly is more than a monopoly but less than perfect competition.

Phone Calls are Dearer Without Competition (Monopolies). A monopoly is generally defined as having more than 25% of market share. The problem of a monopoly existed almost 2000 years ago. John Stuart Mill believed that collusion is more common than a pure monopoly. Monopolies push up prices by limiting supply. The monopoly market can also enter the labor market. Monopolies produces deadweight losses and less consumer surplus. Sometimes, a monopoly can lower the price and also achieve greater revenue. They also have to advertise less as they are already quite large. They can engage in predatory pricing. Most countries have natural monopolies running the utilities. For some natural monopolies, fixed costs are so high that forcing them to lower their price might lead to losses. This is when the government needs to step in.

Whatever renders a larger capital necessary in any trade or business, limits the competition in that business. – John Stuart Mill

Crowds Breed Collective Insanity (Economic Bubbles). Bubbles occur when there is speculation, causing prices to veer from the fair value. This is dangerous as bubbles will eventually burst. “Let the buyer beware” is good advice. ‘Crowds breed collective insanity’. Never underestimate the power of mass media.

Let the Ruling Classes Treble at a Communist Revolution (Marxist Economics). Some places have planned economies. Marx believed in a different economic system. Feudalism was born. Communism will be brought about by revolution. He believed capitalism will eventually hit a downfall. Bourgeoisie vs the proletariat. Those who held production were ‘the ruling party’. He felt that a commodity’s value depends on the labor necessary. Companies will want to pay as little wages as possible. They will also seek to improve technology in the company. This often leads to less human involvement or a poor work environment. The ruling class will tremble once the working class have a revolution. Capitalism believed in the formation of monopolies. Socialism is when the majority of the people have the power. Marx believed in moving a planned economy based on common ownership. Modern society has proven Marx wrong. Death of communism.

The proletarians have nothing to lose but their chains. They have a world to win. Working men of all countries, unite. – Karl Marx

The Value of a Product Comes From the Effort Needed to Make It (The Labor Theory of Value). A certain amount of effort is needed to convert a raw material to a finished good. Marx had his labour theory of value. ‘All commodities, as values, are realized human labour.’ – Karl Marx. Ultimately a value of a good must be derived from the labor costs. Value is determined by the normal amount of labour we expect its production to take. Marx believed in seeing the fruits of your labor and going through the whole process, not just a tiny step of the process.

Prices Come From Supply and Demand (Supply and Demand). Value can be derived from the previous chapter. It needs to be fair for both the consumer and producer. The supply and demand curve was formed. ‘The Marshallian Cross’. The equilibrium is the intersection between the supply and the demand. Firms are price takers (assumption). There is a need to separate fixed and variable costs. Prices are not the only factor that affects demand. Customer tastes and preferences also matter. Producers can entice demand by advertising and giving promotions. Short term products need more price alterations to achieve equilibrium.

In every case the more of a thing is offered for sale in a market the lower is the price at which it will find purchasers. – Alfred Marshall

You Enjoy the Last Chocolate Less Than the First (Utility and Satisfaction). Consumers will only buy more of something if the price falls as they don’t enjoy as much utility from the subsequent purchases. Too much of a useful thing would be no use. Law of diminishing marginal utility. Alcohol is different. The more of which is consumed, the more people enjoy it. People make decisions based on risk appetite and not really their DMU.

When the Price Goes Up, Some People Buy More (Spending Paradoxes). These are Giffen goods. Demand rises when price rises. It has to be an inferior good, where people buy less of it when their income increases. This is because there are other sources/alternatives around. Substantially a large percent of their spending is on the product. No alternatives currently to the product. There is need to outweigh the substitution effect.

A System of Free Markets is Stable (Economic Equilibrium). Leon Walras attempted to establish equations for the general market equilibrium. This is similar to Newton’s three laws. The sum of all excess demand in an economy equals zero. His work builds on the supply and demand graph. The whole economy is interlinked. His equation was reduced to just price and quantities. Flaws in the model. His equations were too technical for most to understand. John von Neumann exposed flaws in his model. Arrow and Debreu, in the 1950s, derived conditions in which Walras’ model would hold. Partial equilibrium analysis is the basic.

The equilibrium re-establishes itself automatically as soon it is disturbed. – Leon Walras

If you Get a Pay Rise, Buy Caviar not Bread (Elasticity of Demand). Changes in income alter the level of demand. This is how the elasticity of demand came about. When prices for bread changes, demand doesn’t vary much as there are few substitutes. Other more expensive items might be more price-elastic. Engel’s law ‘demand for food is income-inelastic’. Demand for expensive items grew as quickly as the increase in income. Inferior goods are those when demand falls when prices increase.

Firms are Price Takers, Not Price Makers (The Competitive Market). This is due to perfect competition. There are a large number of firms. Every firm is selling the same product. There are no barriers to entry. An opportunity for excessive profit will drive more firms to enter the market. There is almost no industry in reality which can fit this model. The world is dynamic and not as flat and static as Marshall’s model.

Make One Person Better Off Without Hurting the Others (Efficiency and Fairness). Pareto efficiency. Pareto believed in ‘ordinal utility’ or relative happiness, rather than ‘cardinal utility’ or absolute happiness. ‘No one can be made better off without hurting someone else’ This is Pareto optimality or Pareto efficiency. Everyone is assumed to know what they want and want to trade to maximize their own utility.

The Bigger The Factory The Lower The Cost (Economies of Scale). Fixed costs is the same, variable costs is reduced. Average cost decreases. Specialization in labor and investment in machinery can aid this process.

The Cost of Going to The Movies is the Fun You’d Have Had at the Ice Rink (Opportunity Cost). This is known as opportunity cost. True cost include both direct costs and opportunity costs.

Economics brings into view that conflict of choice is one of the permanent characteristics of human existence. – Lionel Robbins

The value of something was determined by what had to be given up in order to get it. – Friedrich von Weiser

Workers Must Improve Their Lot Together (Collective Bargaining). There are more employees than workers, therefore they hold the balance of power. Therefore, workers need to act together to fight for their rights. There are unions present to help them with it. However, those jobs that are protected by the Union enjoy better benefits than those which are not covered by the Union.

If a group of workmen concert together, and send representatives to conduct the bargaining on behalf of the whole body, the position is at once changed. – Beatrice Webb, Sidney Webb

People Consume to Be Noticed (Conspicuous Consumption). Rich like to purchase expensive goods to flaunt their wealth and status. This is known as ‘Conspicuous Consumption’. Expensive goods or branded goods are also known as ‘Veblen Goods’.

Economic behavior is driven by psychological factors. – Thorstein Veblen

Make the Polluter Pay (External Costs). Government can step in and force polluters to pay. These are known as negative market externalities. This idea came from Arthur Pigou and the tax is known as ‘Pigouvian tax’. Governments use this to reduce carbon emissions. However, how much to tax can be big issue.