Why Central Banks Are Reaching a Dead End

Posted on March 6, 2017 by TheYoungSocrates

Central banks have the duty to keep inflation below but near a certain level (2% in the case of the U.S. and the Eurozone). They use monetary policy for doing so. In case inflation gets too low, they decrease the interest rate, thereby spurring lending, hence inflation. In case inflation gets too high, they do the reverse. This policy is believed to be effective, and to have contributed to normalization of the inflation-rate in the past.

All well and good so far. But as anyone knows by know: there is something odd going on. We hit the 0% interest rate level in the U.S., and have even reached -0.4% in the Eurozone. This is a logical consequence of decreasing the interest rate more in times of accommodative policy than decreasing it in times of tightening: a downward trend, hitting 0%, and rates below 0%, at some point in time.

source: tradingeconomics.com
The down-trend in the interest rate

The year 2025

In principle, central banks could continue this downward trend in the interest rate indefinitely. In practice, most likely not. Lets take a look into the future, and see what would happen if we would continue this downward trend.

Suppose it is the year 2025, and, for whatever reason, we have (the risk of) deflation in the Eurozone. The ECB – having increased the interest rate from the level of -0.4% in 2017 – decreases the interest rate gradually from (let’s say) 1.5% to -1.5% (a decrease of 3%, which is less than the decrease after the crisis in 2007, hence not unrealistic). So now we have an interest of -1.5%.

Given such a low interest rate, either of two things are likely to happen, that we might want to avoid at all costs: the net income of retail banks gets literally nullified, or retail banks have to charge customers for keeping their money.

As shown in quantitative research, a decrease of 1 percentage point in the 3-month yield (which will occur in case of a decrease in the deposit rate to -1.5%) leads to a decrease in the net interest margin of banks (in advanced economies) of 60 basis points. What does this mean in case of our rate decrease to -1.5%?

Take ING (the largest Dutch retail bank) as an example. ING has a net interest margin of around 1.5% over 2016, resulting in a net interest income of around 13.2 billion euros, and a net income of 4.651 billion euros.

source: tradingeconomics.com
Inflation in the U.S.

A rate decrease to -1.5% will cause ING’s net interest margin to decrease to less than 0.9%, implying its net interest income will be 40% lower than in 2016, decreasing by +- 5.2 billion euros. Hence ING’s entire profit will obliterated. Assuming that the lion-share of cost-cutting has been done already in response to the crisis of 2007, this leaves little room to cut costs. And anyway: if the down-trend in the interest rate will continue, at some point the net interest income will become so low than no cost-cutting measures can make up for that.

Hence, decreasing the interest rate beyond some point will seriously put to risk the existence of retail banking in the Eurozone. Assuming that Draghi doesn’t want that to happen, the interest rate can never get lower then a certain level (-1.4% in our example – the real number might of course be different, but this doesn’t affect the principle at stake here).

Retail banks could of course adjust their business model, and charge people for holding their money. Suppose that, in case the interest rate gets below a certain point, banks will do so. How much can they charge people before people will withdraw their money and start putting it into safes? Let’s say that banks, due to lower net interest incomes resulting from the lower interest rate, charge customers 0.5% for holding their savings. If you own 200.000 euros, this comes down to 1000 euros a year. I can imagine this might already be sufficient for many people to start putting their money into a safe instead of their bank, hence causing significant draw-downs, and endangering the banking system. Again: the real interest rate at which this event might occur might differ from this example, but the principle still holds.

Assuming Draghi doesn’t want this to happen either, we can never lower the interest rate below a certain level.

What then?

But, assuming that we can never lower the interest rate below a certain level (which might be not too far in the future as showed by the reasoning above), what then can we do to deal with low inflation in the future? Lowering interest rates is no option any more.

One possibility would be fiscal policy. We could push the responsibility for maintaining a reasonable level of inflation from central banks to governments. But this might very well imply that governments have to borrow significant amounts of money to kick-start inflation. Judging by the amount of money pushed into the market by the ECB to increase inflation, this lending will lead to exorbitant increases in public debt, hence interest payments.

Central banks could of course buy other assets, such as equity, instead of bonds, when the interest rate has reached its lowest level. The problems from doing so are obvious: it might cause a significant disconnect between share prices and real business activity, resulting in bubbles. Furthermore, it might not be very effective in increasing inflation, because we don’t know how much of the money put into stocks will eventually reach the real economy.

Another option would be helicopter money. But what if the helicopter stops dropping money? Then we are left with higher prices, but not more money to pay for them, laying the foundation for another period of deflation.

Accepting deflation

We could also just accept deflation. We have been trying to fight it for over 30 years, like our lives depend on it. But do they? How problematic would it be for prices to decrease for an extended period of time? Would people really stop buying stuff, because it will become cheaper in the future? That seems unrealistic. People still need to buy food, clothing, and still need a roof above their head. So deflation might not be such a big issue after all – unless it becomes extreme, of course.

It is choosing the least worst option among a bunch of bad options. Hence we should not rule out any response to low inflation because its effects are undesired: it might still be the best option.

One thing seems crystal clear: we have to think about future responses to low inflation, because the path we have currently taken seems to be near reaching its end point.

Why Economic Growth is More Important than Gender Equality

Posted on March 31, 2016 by TheYoungSocrates

Figure 1: Taking care of moral issues enhances the economy

I think most of would agree that issues such as gender equality, education and malnutrition are important matters. Not only morally, in the sense that anyone of us should have the right to be treated equally, to receive education or to have proper feeding, but also because of their economic consequences. Studies have shown that gender inequality, lack of education and malnutrition affect the economy of a country negatively (see Figure 1). But fewer studies, at least none I could find, look at the relation the other way: what are the effects of economic development on gender inequality, education and malnutrition? Or more broadly: what are the effects of economic development on moral issues, instead of the other way around?

Let’s take gender equality, for example. I think it is reasonable to assume that when a country develops economically, the role of women in society will improve – in the sense that they are treated more equally to men. For suppose people have more disposable income, as a result of economic development. Then this money might allow families a sense of freedom that partially breaks down the traditional role division between the working man and housewife. The money might for example allow women to pursue their interests, whether this be education, painting or something else, thereby enabling them to develop in a manner similar to men.

Furthermore, economic development might reduce the number of children per family, thereby putting less pressure on either the man or woman to stay at home to care for the children. This enables both parties to participate more equally in, for example, the workplace.

Economic development might also increase the level of education in a society. In case there is a system of private schooling in place, this is obvious. For if people have more income to spend, they can spend more on the education of their children, thereby increasing the level of education received in society. Also, more income means more taxes. In case a country has public schooling, more taxes allows for a more elaborate educational system, thereby enhancing education. Also, when families have more income, their children might not have to do labour to increase the family’s income. This provides them with the time required for education.

Malnutrition; another problem. It is obvious how malnutrition might be bad for a country’s economy. But it is just as obvious how economic development might reduce malnutrition. After all: if people have more income to spend, they can spend more money on food, thereby decreasing the level of malnutrition. Furthermore, if an economy develops, the supply of food might increase, since there might be more economic demand for food. The food might also be cheaper due to increased mass production, hence increasing the availability of food for the common people.

I am sure there are many other moral issues I didn’t deal with in this article (think about poverty, or child labour), but that affect both the economic development of a country and are affected by it. But what each of these matters appear to have in common is that they can be improved by improving the economic development of a society. Hence, in case you want to improve the well-being of a society, as many charities might want to do, you might be better of developing a society economically than to try and solve each moral issue one by one (see Figure 2). Because why choose the hard way when there might be a much simpler solution?

Figure 2: Economic development might (partially) solve moral issues

What do you think?

Why It Is Possible to Make Above Average Returns – Even in Efficient Markets

Posted on February 25, 2015 by TheYoungSocrates

There is a well-known hypothesis in financial economics, called the Efficient Market Hypothesis (EMH), that spawns a lot of debate. The EMH states that financial markets are ‘informationally efficient’. In other words: a financial asset’s market price always incorporates and reflects all available relevant information. Hence no investor can consistently use such information to find stocks that earn him above average returns. After all: such information is already reflected in the asset’s price; so if there is a lot of ‘positive’ information about the company, the stock’s market price will have increased, and if there’s a lot of ‘negative’ information, the price will have decreased.

I want to make an argument why, even if the EMH holds, it might still be possible to consistently earn above average returns on investments. The argument is basically very simple. Let’s first recall the EMH. We know that an efficient market is a market in which the price of a financial asset (let’s say a stock) always incorporates and reflects all available information. Hence, you cannot benefit from the set of available information in such a way that you can consistently earn above average returns on investing in the asset – or any asset for that matter. But does it follow from this that you cannot consistently achieve above average returns? I don’t think so.

Because what if you are consistently better than other investors in anticipating future information? Then, even though the stock’s market price reflects all available information, you can utilize this anticipated future information to decide whether to buy or sell a stock. And if you can anticipate future information (which is information not yet incorporated and reflected in the stock’s price) better than the average investor, then you can earn above average returns, time after time.

However, anticipating future information and consistently earning above-average returns is no easy feat, and requires extensive research and expertise in the financial industry. Wealth management firms, with their team of experienced investment professionals, can provide individuals with the necessary tools and knowledge to make informed investment decisions. By partnering with a trusted firm, individuals can learn more about Vigilant Wealth Management and how their investment strategies align with their personal goals and risk tolerance. While the EMH may hold in theory, the reality of the financial market is much more complex, and it is important to have a skilled team on your side to navigate it effectively.

This all sounds pretty abstract. So let’s look an example. Suppose there is a stock of a company that produces wind turbines – call it ‘stock A’. Furthermore, let’s suppose that at this point in time investors are on average not confident about wind energy’s potential. They might think that the cost of producing wind energy is too high, its profits depend solely on the current regulation, or that it will still take a long time before our fossil fuels are depleted, making the switch to wind energy not urgent yet. Given these considerations the stock trades at a price of – let’s say – 10. Let’s assume that this price indeed incorporates and reflects all available information – such as information contained in annual reports, expert analyses etc. Hence it seems reasonable to say that you cannot consistently earn above average returns on this stock by utilizing only this pool of existing information.

But what if you believe that, given the ever increasing energy consumption and ever decreasing level of fossil fuels, society has in the middle-long term no choice but to turn to alternative forms of energy – forms such as wind energy? If you think this is true, then you can anticipate that any future information about the wind-turbine producer will be positive – at least more positive than today’s information is. You can anticipate that the future information will show an increase in the firm’s revenues, or – for example, in case the firm is close to bankruptcy but you know that its managers don’t profit from a bankruptcy – a decrease in costs. Given that the market is efficient, you know that at the time this information will become public, the market price of the stock will increase to reflect this information, to a price of let’s say 20. If you can anticipate such future information consistently, then you can anticipate the future stock price consistently, allowing you to consistently earn above average returns – despite the perfectly efficient market.

An equivalent way to look at this matter is to say that you take into account more information than the average investor in calculating the stock’s fair value. Let’s say that you are doing a net present value calculation, and you have estimated the firm’s future cash flows. In case of stock A, investors used estimated cash flows that lead them to a fair value of 10. However, given your anticipation of future information, you estimate these cash flows to be higher – leading you to a higher valuation of the stock. Again: if you can consistently anticipate future information better than the average investor, you can consistently earn above average returns – even in an efficient market.

Why Economics Should Return to its Roots

Posted on December 8, 2014 by TheYoungSocrates

Economics explains how people interact within markets to accomplish certain goals. People; not robots. And people are creatures with desires, animalistic urges that guide them into making conscious, but often unconscious, decisions. That sets them apart from robots, which act solely upon formal rules (If A, then B, etc.). But this difference between humans and robots shouldn’t have to be a problem, right? Not if economics takes into account the fact that humans are biological creatures, who (might) have got a free will; an observation which makes their actions undetermined and therefore unable to be captured in terms of laws.

It seems fair to say that we all want to increase our utility – in the broadest sense of the word. But do we always know why we want to increase our utility? Don’t we never ‘just want’ to go out, ‘just want’ to buy a new television, ‘just want’ to go on holiday? Yes we do: it seems that, sometimes, we just happen to want things: we don’t know why, we don’t have explicit motives for our desires. And if we – the people having the desires – don’t even know why we do things, how on earth could economists know, let alone capture these actions in laws? That’s only possible if you make assumptions: very limiting assumptions.

Rational choice theory is a framework used within economics to better understand social and economic behavior by means of formal modeling. But if this sense of understanding – that is possible only through formalizing humans’ behavior – is only possible by treating humans like robots, what then, on a conceptual level, is the difference between economics and artificial intelligence? Besides that the latter really works with robots and the former seems to assume to work with robots? Robots whose actions are fully predictable and explainable by a set of parameters: speed, vision, greediness etc. Or its formal economic counterpart: humans whose actions are manipulable by changing interest rates, government expenditures, taxes and other parameters that are part of the large economic machine we are all a part of. Assuming a mindless creature, following formal rules, makes it possible to capture his intentions in a formal corset. Everything should be dealt with in a formal manner: even uncertainty should be put in mathematical terms. Anything to make sure that we don’t miss out on any of the creature’s shenanigans. Even the ones that are grounded in the deep domains of irrationality.

But maybe it’s time to wake up and ask ourselves the question: have we come to forget what that we’re dealing with humans here? That the economy is not a steam engine, robot or any other mindless entity whose actions are fully explainable – let alone predictable. Have we forgotten that economics is a ‘social’ science, a science dealing with products of the human mind, related more to psychology than to mathematics?

It’s understandable that economics wants to position itself as being a ‘genuine’ science, a science that is able to objectively describe the way the world works. A science that wants to show that it is capable of capturing its findings in laws. But why should economics be dependent upon these kind of formalities in order for it to be a science? Isn’t it time for economics to stop being insecure? To realize that it’s beautiful the way it is. Why does it behave like an 18-year old girl, whining and crying about the girls who she thinks are prettier than her? Stop it economics! You’re pretty: be happy with what you are.

But this leads us to the real question: what is economics? Economics is – much like politics – a system created by the interaction between us human beings. A system that – although less explicitly than politics – is founded on the notion of morality: our ideas about what’s right and wrong. It’s no surprise that figures such as Adam Smith and Friedrich Hayek have been so influential in economics. They understood what economics was really about: economics is in the basis a philosophy of what it means to be a human being, and the fundamental rights that each one of us should have. This ethics is the starting point of their economic systems. And that’s a tradition current economists should try to continue: interweaving morality and money. Keeping an eye on the moral fundamentals underlying markets and coming up with original ideas about how to improve these markets on a moral level. So there’s plenty of work left to do for the genuine economist.

But what do you think?

Commercials: Not All Publicity is Good Publicity

Posted on December 8, 2014 by TheYoungSocrates

Commercials: you’re likely to absorb hundreds of them per day, via media such as the TV, radio and internet. As I have written about in a previous article, the average person spends 1/24 of his life watching commercials on television. That’s a quite a lot, isn’t it? But I don’t want to focus on this act of wasting our lives by consuming useless material. I want to take a look at the effect of commercials, and of marketing in general, on the perception of a company’s brand. Most companies seem to believe that any publicity is good publicity. They seem to think that – no matter how bad a commercial might be – it’s always better to have a commercial than to have no commercial at all. But the question is: is this true?

When you’re watching television, and you see a commercial of a brand you’ve never heard of before, what will be the effect of this commercial on your perception of the brand? Marketers seem to think that they’ve increased your ‘awareness‘ of their brand, in the sense that – consciously or not – you now know about the brand‘s existence. And this might very well be true. But then the question would be: is all awareness good awareness? Or can awareness – as created by commercials – lead to a (more) negative (instead of positive) perception of the brand by the customer?

I believe it can. I believe that whenever people see terribly non-funny commercials (as there are plenty of) on television, they associate the brand promoted in the commercial with negative values such neediness, pity and lameness. I believe that the next time these people are in front of, for example, a supermarket they’ve just seen in an utterly non-funny (but intended to be funny) commercial, they will think to themselves: ‘Come on, I’m not going to support such a quasi-funny company’, and they’ll decide to skip the store. Even though these people might have entered the store if they hadn’t watched the commercial, or if the company wouldn’t have produced the commercial in the first place. But now they’ve got all kinds of negative associations with the brand, they decide to skip the store and go to another store – which might have less awareness but still more positive awareness than the supermarket of the commercial. And this goes not only for the supermarket-market, but for any other kind of market as well.

Customers usually don’t care about whether a brand is well-known – note that this doesn’t hold for clothing brands and other products that depend for their value to a large extent on marketing. We just want to buy a particular good or a particular service. And the only thing guiding us to a particular store is our perception of this brand/store. And if this perception is negative – which it very likely might be as a result of a bad commercial – you’d consciously avoid this store, and move to a next one. Even though the particular brand might have put a lot of money into its marketing efforts, they’re worse off than they would have been if they hadn’t launched the commercial.

Of course, marketing – including commercials on television and radio – can have a positive effect on a company’s brand and consequently on the sales of the company’s goods/services. But only if the company markets the relevant aspects of its brand, and not just launches a commercial for the sake of showing how ‘funny’ it is as a supermarket. Most people won’t appreciate that: the intelligent people might feel like they’re being treated like babies, and will therefore consciously avoid the brand, and the less intelligent people might not respond at all to this irrelevant kind of commercials.

If want to get people to your store (or make use of your service), you have to stay close to the product your selling, because that’s where customers are coming for or not coming for. Emphasize your low prices, your current actions/sales or your great service, and skip the bullshit. Then, and only then, can marketing attract – instead of scare away – customers.

But what do you think?

Milton Friedman’s Voucher Plan

Posted on December 5, 2014 by TheYoungSocrates

More than 30 years ago – in 1979 – Milton Friedman and his wise Rose Friedman published the book Free to Choose, in which they made a (compelling) claim in favor of handing over authority to the free market, and taking it away from the government. The arguments they come up are profoundly grounded in empirical evidence, pointing at the inefficient and unequal spending of tax payers’ money on the ‘big issues’ of society (healthcare, Social Security, public assistance etc.). I want to focus at the expenditures on public education, about which the Friedmans say a lot, and in particular on the immoral and degrading effect this can have on citizens.

We humans are intelligent creatures. Some are – without a doubt – better equipped (mentally) for dealing with the whims of the free market than others, but still almost all of us are reasonably capable of fulfilling our needs in life. We can go the supermarket by ourselves, decide for ourselves what we want to eat for breakfast and dinner, and much more. The government doesn’t have to do this for us. We can decide for ourselves how we want to spend our leisure time: whether we want to go the movies or not. We don’t need the government to decide this for us. Not only because the government cannot know what each one of us wants – therefore inevitably being inefficient in the spending of its – or our – resources – but also because we know that we are intelligent beings, very much capable of making our own decisions in life.

And this intelligence of ours doesn’t have to confine itself to mundane decisions like how to spend our free time. We are equally competent in deciding for ourselves how we want to spend our money on more pressing issues in life: what hospital we want to attend, whether to assist our loved ones financially whenever the need might arise, and what school our children should attend. These issues are of such importance to our well-being – and our children’s – that, instead of putting the government in charge of these decisions, we should be the ones choosing what we consider to be best for our, and our children’s, future.

In 1979, the Friedmans noticed an upward trend in the government taking control of many of these decisions – decisions that, by the way, have a relatively big impact upon our financial resources. The most striking example of this might be the public financing of (elementary, secondary and higher) education. In 1979, the average US citizen paid 2.000 dollars per child that attended public education, even though not everyone’s child – assuming that you even have children – made use of public educational resources. The Friedmans found this state of affairs harming to the right of each individual to decide where to spend his money at, including the option to put one’s child at a privately financed educational institution.

Therefore they came up with a ‘voucher plan’: a plan in which every US citizen would – per child they have – get a voucher exchangeable for a certain amount of money – let’s say 2.000 dollars. They could cash in this voucher only if their child would attend an appropriate educational institution. This voucher plan would come in the place of the tax each US citizen is obliged to pay, irrespective of them having children and irrespective of their children attending a public educational institution. This plan would make sure that only the ones making use of pubic educational services would be charged, thereby excluding the non-using part of society.

The Friedmans made – primarily – financial arguments in favor of their voucher plan, saying that – on the whole – public educational costs would remain the same, and that parents would use their increase in autonomy to find the school that best suited the needs of their children. The relatively free market that would be created on the basis of the voucher plan, would improve the quality of both public and private education. I believe, however, that one argument in favor of the voucher plan, and the free market in general, has not received the attention it deserved – at least not in the Friedmans’ Free to Choose. And that argument has to do with human intelligence.

As pointed at above, humans are – for the biggest part – perfectly capable of deciding for themselves where to spend their money at. We wouldn’t want anyone else to do our groceries or schedule our leisure time for us – at least not for (our) money. But that is exactly what the government does when it comes down to public education. The government proclaims that – as the Friedmans explain – it is the only actor possessing the professional knowledge required for deciding what is best for our children – thereby implying that they are indispensable in order for our children to receive a qualitatively good education.

What this claim comes down to is the government saying – or not saying – that we (‘the crowd’) don’t understand what is important and what is not in regard to our children’s education, and that – because of that – they should step in and release us of this impossible duty of ours. We don’t understand what to do, but luckily they do. They are the father looking out for us, protecting us from doing harm to our children and to the rest of society.

I find this an insult to the basic level of intelligence the majority of the people has. We very well believe to know what is important in our children’s education – probably much better than the government, since, in contrast to the government, we know our children. Thus besides all the financial benefits of the voucher plan, by returning autonomy to the Average Joe, a voucher plan is required for respecting people’s intelligence. After all, we are no fools, are we?

What do you think?

Why You Should Always Respect the Dustman

Posted on November 24, 2014 by TheYoungSocrates

I have been a dustman for a while. And even though my stay in the ‘dustman-community”’ was short, I was long enough to become overwhelmed by the disrespect these people receive from their fellow species members. People are yelling things at them. People are telling them how shitty their job is. People treat them like the true pieces of garbage. I was wondering what the dustmen themselves were thinking about their profession. Were they also disgusted about what they were doing? I decided to ask them.

And this is what they told me: they absolutely loved what they were doing. They were proud of being the dustman of district x or district y. They took care of the streets that fell under their supervision. These were after all their streets, and their streets should not be dirty. One of the dustmen told me very proudly about his dustmen-crew. He said that, within the dustmen-community, his crew could be compared to FC Barcelona; that’s how well they anticipated each other’s actions. Dustman A knew exactly that, when Dustman B grabbed on to a new dustbin, he should be in the process of taking away his bin.

So it seems that people differ, to say the least, in what they like and what they don’t like to do for a living. And that’s a good thing, right? Of course it is. Because the fact that each one of us wants to do something different for a living makes that all the jobs that are required to keep our society functioning are filled. If everyone wanted to become a big time actor, no-one would be cleaning the streets of Hollywood. At least, not for a while. Because the demand for dustmen, and therefore the wages, would increase sooner or later thanks to the ‘beautiful’ mechanisms of the free market.

Also, the fact that people appreciate different ways to make their money provides you and me with the opportunity to make a unique contribution to this world of ours. And – I believe – it is only if you do what you like to do that you are likely to put the most effort in doing it. And, subsequently, it is only when you put serious effort into doing something that you are likely to make a difference. And it the ambition to ‘make a difference’, whether it is by cleaning the streets or by writing an article, that gives that feeling of happiness and fulfilment we are all so desperately longing for.

The moral of this story should be clear: never disrespect anyone or feel pity for anyone because of what they do for a living. Remember that (hopefully) most of us are doing something that we like to do. Be thankful for whatever their contribution to society might be, since it is because of their contribution that you and I can do the job that we like to do. Whatever that might be.

But what do you think?

The Difference between What You Get and What You Earn

Posted on October 30, 2014 by TheYoungSocrates

In economic theory, it is claimed that if a market would function perfectly, people would get for their products and services whatever it is they contribute in terms of value. And the same goes the other way: people would pay whatever they find a product or service worthy of. But when you take a look at the real world markets, and all the actors in these real world markets, this principle doesn’t seem to hold. Not at all.

I want to show this by giving one example. That of the banker, and the hacker.

A banker invents all kinds of ingenious derivative constructs, futures and other financial products in order to make money. The more complex the better. For if a product is complex, the layman doesn’t understand it. And if the layman doesn’t understand it, it is easy to lure him into what might seem to be an attractive deal, but which in fact is nothing but a ticking time bomb.

It is generally acknowledged that bankers, and especially the bankers referred to above, are at least partially responsible for the credit crisis we have experienced. It is safe to say that a lot of wealth has been lost during the crisis; people lost their homes, their jobs, and governments had to step in to save the day. In other words: these bankers have, at least over the last couple of years, made a negative contribution to the overall utility of society.

Why then do they get paid so much? Why then do they get a high positive utility for acting in a manner that ultimately decreases society’s utility? Although I am not interested in explaining this phenomenon in this post, one explanation could be that it seems like the bankers contribute a lot of happiness, because they (can) create a lot of money, and – in our capitalist society – money equals happiness. Hence the bankers create a lot of happiness.

Luckily, there are also people who do the exact opposite: they don’t get paid anything while making lots of people happy. They are the modern day equivalent of Robin Hood. An example would be the people contributing content to Wikipedia. But also the people behind Popcorn Time; a digital platform at which you can stream pretty much any movie, and all for free. These people make very many people happy – an exception would be the film distributors of course – but don’t get paid anything. Even though, in contract to the banker, their net contribution to society’s utility is positive.

Although we don’t pay the Wikipedia guys and Popcorn Time geeks in terms of money, we can pay them in terms of a currency that is even more valuable: gratefulness and respect. Something the bankers cannot count on. Because after all: there is a difference between what you get, and what you earn.

But what do you think?

Why Students from Top Universities might be Worse than ‘Not-top’ Students

Posted on June 25, 2014 by TheYoungSocrates

The University of Cambridge: one of the top universities

It is a fact that some universities are more popular among employers than others. See this link for a ranking of the top 10 universities in the world — according to employers in 2013/2014. There are hardly any surprises in this top 10. As always, the University of Oxford, Cambridge and Harvard are included.

The question I ask in this post is: based on what criteria does an employer prefer one university to an other? And how reasonable is it for a company to base its preference on these criteria?

Admission standards
It seems fair to say that universities like Oxford and Cambridge have higher admission standards than pretty much any other university in the world. Therefore, being admitted to such a university is by itself an indication that you are ‘better’ (in terms of pre-university academic results etc.) than non-admitted applicants.

Hence one could say that it makes sense for employers, knowing about these strict admission procedures, to be more inclined to pick someone from such a university than from any other university. After all, the ‘top’ universities already have done part of the selecting for them.

Harvard students not necessarily better
But the above reasoning is not valid. Since even though it might be true that the Oxfords and Cambridges of this world pick the students that were the best before they entered university, it doesn’t follow that these students are still the best after they have been through university.

It might very well be so that someone who didn’t do his utmost best in his undergraduate studies (and therefore was not admitted to a top university) decides to change his effort when attending a Master. After all, he knows that there are people from Oxford and Cambridge around, so he has to step up his game in order to get a decent job.

The opposite might be true for a person studying at a top university. He might feel like, now he has been accepted into this prestigious institution, the chance of him finding a good job have increased significantly; so much that ‘just passing’ his Master might be sufficient for him to still obtain a job that suits his criteria.

In other words: getting a degree from a top university doesn’t necessarily make you more educated than someone who has got his degree from a ‘not-top’ university.

Social factors
When we look a little further, we see that social factors play a role too in the hiring process of a company. After all, a company – let’s call it ‘Company A’– wants the best employees. Therefore it might look at the ‘best’ firms in its industry in order to see where they get their employees from. Seeing that they get their employees from the top universities, the company believes that it should do so too; after all: these companies are the best in the industry, hence they should have the best employees, right? And given that these employees come from the top universities, these universities must provide the best employees. Hence Company A hires someone from a top university.

Now assume another company enters the industry. This company will be even more inclined to hire someone of a top university because of the increase in the university’s reputation due to Company A employing its students. This points to the fact that companies do not look solely at the capabilities of its potential employees; the reputation of the university the candidates have studied at is of importance as well.

Top universities still good
The above is not to say that employing students is all based on the unjustified supposition that top universities provide the best employees. After all, it seems reasonable to suppose that those entering top universities are motivated, disciplined and will enhance their capabilities while attending the top university. Hence it is likely that they will still be ‘best’ after having gone through their top-university education.

Given that being a good student implies being a good employee, the latter implies that these students will be good employees. But it should be kept in mind that social factors such as the reputation of a university are self-perpetuating, hence no watertight indicator of the quality of students.

Why the High Taxation on Cigarettes is Unjustified

Posted on May 2, 2014 by TheYoungSocrates

According to a survey held by the British Action on Smoking and Health (the ASH, for short), 20 percent of the British adults smoke. Is this a good thing? I don’t know. I believe that the act of smoking isn’t intrinsically good or bad; it is something that each person should decide for himself. However, what I do believe is valuable in its own right is human autonomy. By autonomy I mean ‘the right each person has to decide for himself how to live his life without unjustified intervention from external parties‘. And it is this latter point I want to draw attention to.

According to the ASH, in 2012, 77 percent of the price of a pack of cigarettes consisted of tax. Multiply that by the number of cigarette packs sold, and you get an amount of £10,5 billion raised through tobacco taxation. This is six times as much as the spending by the the National Health Service (the NHS) on tobacco related diseases; these were ‘merely’ £1,7 billion. So the question that comes to mind is: what justifies the £8,8 billion that remains after subtracting the NHS costs from the money raised through tobacco taxation?

The ASH claims that the inequality between the two numbers is no issue, for ‘tobacco tax is not, and never has been, a down payment on the cost of dealing with ill health caused by smoking’. But what then is the purpose of this tax? The ASH claims that the high level of tobacco tax in Britain serves two purposes: (1) to reduce smoking through the price incentive, and (2) to raise taxes from a source that has little impact on the economy. The latter point has been scrutinized extensively by economists, and I don’t think I can add anything to that discussion. So let’s focus on the first point: the aim of reducing smoking through the price incentive.

When considering the boundaries of government intervention and moral considerations surrounding tobacco taxation, it is crucial to acknowledge the significant impact of smoking on public health and healthcare services. Smoking-related diseases impose a burden on healthcare systems, necessitating resources for treatment and care. To address the resulting health concerns, urgent care on 37th ave Jackson Heights NYC, play a vital role in providing accessible and efficient medical assistance to individuals affected by smoking-related illnesses. By supporting these healthcare facilities, it becomes evident that while the debate over tobacco taxation and government intervention continues, the importance of ensuring adequate healthcare services for those in need remains paramount.

By making this claim, the ASH implicitly assumes that it is within the government set of rights to reduce smoking among its citizens. But is it? One can justify tobacco taxation on the grounds of the (health care) costs incurred by the non-smoking part of society. But, as we have seen, this amount by no means adds up to the taxes levied on tobacco. I believe this question (‘But is it?’) directs us towards the fundamental question of where the boundaries lie between justified government intervention and morally objectionable behaviour. One could say that, as I believe, it is one thing (and justified) to prevent non-smokers from being financially hurt by the actions of smokers, but that it is a completely different thing (and not justified) to promote non-smoking values among citizens, merely for the sake of – what appear to be – paternalistic motives.

As with any government intervention, the benefits of the intervention should be weighed against its costs. Presumed that there might be an intrinsic value in having a non-smoking society – a point the ASH doesn’t provide any argument for – the costs of violating what might be an intrinsically valuable human right (autonomy, that is) should be included in the calculation as well. And until this has been done, the question of whether the £10,5 billion in tobacco taxation is justified remains open for debate.

But what do you think?

The Inevitable Unfairness of the Free Market

Posted on April 29, 2013 by TheYoungSocrates

I just finished reading Milton Friedman’s book Free to Choose: a plea for the free market. Friedman has some compelling claims against government intervention in economic transactions. Price is – as he claims – the most informative entity there is in communicating individuals’ demand and supply of goods and services, and, in a capitalistic society at least, provides people with the incentive to utilize this information, thereby satisfying the needs of those that demand the goods/services. Furthermore, by acting upon the information, individuals provide themselves with the resources required to live a decent life. But although the free market – as Friedman describes it – seems a beautifully simple and elegant construct, there are some ‘side-effects’ of the system that might run against our intuitions about the notion of fairness.

It seems clear that the free market is the most efficient medium there is for maximizing the value of each of the individuals involved. And that (the ‘maximizing of value of each person involved’) is, according to libertarians, what makes the free market a fair system. After all, if you want to sell a computer, and another person is prepared to pay you the price you charge, then it’s only fair to let this deal take place, isn’t it? There is mutual consent between the parties involved, so what – if anything – could give a third party the right to intervene in this seemingly flawless transaction?

While there indeed might be nothing wrong with the free-market mechanism from the perspective of exchanging value, it might be doubted whether it is fair to make this mechanism the only mechanism for exchanging value. For while it’s no problem – and might even be beneficial – for those parties in a free market that possess the means to participate in the ‘game’ of exchanging value, it might be harder for those that – by nature or environment – have been unfortunate in acquiring the means required for satisfying their needs.

Because what if you’re not as intelligent as the average person, therefore getting a relatively low-income job, such as being a plumber, because of which you are unable to satisfy your needs to the same degree as – let’s say – a banker or lawyer? Of course, a libertarian might say, the plumber can still participate in the free market, just like the banker or lawyer can. But, even though the three parties might have the same needs (for luxury or otherwise), the plumber cannot satisfy as many of his as the banker and the lawyer can of theirs: only because nature happened to endow him – in contrast to the banker and lawyer – with capabilities that apparently are less appreciated (since less demanded) in society. So the question is: is it fair to let nature – and thus chance – play such a drastic role in the ability of any person to satisfy his needs?

A libertarian can answer this question in either of two ways. Either he admits that the extent in which we’re able to satisfy our needs is indeed – in principle – determined by nature’s authority over our capabilities, or he must come up with an ingenious invention for how to solve this negative side-effect of the free market without thereby endangering the libertarian heart of his plan. The first option, although this appears to be mostly ignored by libertarians, seems to imply a notion of ‘fairness’ that I – and I assume many others – find highly questionable. On the other hand, it at least is a notion, and – given that this truly is the libertarian’s view of a fair world – should be accepted for what it is.

The latter option – on the other hand – provides more room for discussion. Because how – if ever – could it be possible to solve nature’s capability-casino by means of a libertarian solution? There are of course many plans one could come up with, all of them mitigating the negative effects, but all of them being either (1) in conflict with the libertarian aspiration of a free market or (2) don’t get down to the root of the problem (that is, the unequal distribution of capabilities over mankind). It seems fair to say that (2) is a kind of unfairness that is inextinguishable – not by socialism nor by libertarianism. We after all cannot redesign our beings in order to endow everyone with the same capabilities. And even if we could do so, it’s high questionable whether this choice would be beneficial to society as a whole. So it seems we’re stuck with (1), pointing us to the possibly unfair consequences of the free market.

The above reflection shows that there seems to be an intuitively unfair side-effect of the free market; a side-effect that is unsolvable by means of the free market-paradigm itself. It either requires us to adopt the libertarian notion of ‘fairness’, or requires some sort of (government) intervention in order to compensate for nature’s ‘unfair’ distribution of capabilities.

What do you think?

The Changed Nature of Money: From Gold to Digital

Posted on April 22, 2013 by TheYoungSocrates

What is money? In the Middle Ages and before, money was a physical entity. Something you either had in your pockets, or not. Whether it was cows or gold, it was something you could touch, something of which you knew it couldn’t just be created “from thin air”. Although gold coins could be made by the government, the government still needed gold to make the coins. And since getting gold wasn’t easy, you could trust that the amount of money in a society – whose value was based on the amount of gold being in circulation – wouldn’t fluctuate that much. You had certainty, just like you could be certain that the tree in your backyard couldn’t grow new apples every day. It was a gradual, natural process. And this was a calming thought, ensuring you that the value of your money would be rather stable of time.

But now – a couple of centuries later – we’ve got the internet, and everything has changed. Money no longer is gold, but is replaced by a string of digital numbers on your computer. We no longer pay the butcher by handing him over a few tangible units of gold, but we put our plastic card into a digital machine and our digital string of numbers gets digitally reduced. The comfort that this brought us is enormous. We don’t even have to carry gold around anymore.

But although the “digital era” brought us many comforts, it also brought uncertainty – and vulnerability – into our lives. Because who ensures us that the amount of digital money that is in circulation will be a stable amount of money over time? Who ensures us that, whenever the government feels it’s losing in popularity, it cannot just put an extra zero-digit behind the digital number on its bank account? Who ensures us that – like cows and gold – the value of money is based on stable, natural entities that cannot be created from thin air, and not merely upon our perception of the value of money, which is an entity susceptible to the whims of those with monetary power? In other words: who guarantees the value of our money? Who besides ourselves, besides our perception of money? And if the value of money is merely dependent upon our perception of it, then how easily can this perception – and thus the value of our money – be adjusted by means of external intervention? How much certainty do we have regarding the value of our future money?

Because what is the value of money if we can just hand over an 8-digit number to Greece, knowing that it will never come back, and not even worrying about it never combing back because we know we can create more money whenever we want to. Who can ensure us that the money we’re working for is really worth the value we expect it to be worth over time? What is the value of money if new money can just be printed over and over again? Or even worse, when it requires nothing but the adding of an extra digit in the server space of the government. Is that still money? Or is it a 21th century substitute for money, created as a logical consequence of our fetish with digital technology and its “benefits”?

Let’s stay realistic. One thing we can reasonably say is that money – instead of possessions like gold and cows – has become more of a means for exchanging rights and less of a means for exchanging property. Rights of obligation, rights of someone to do something for another person in change for an increase in that someone’s right to legitimately claim something from others. I know it sounds abstract, but that is because it is abstract. The non-abstract gold- and cow time is over. Mutual obligations are all that remains. A problem? Maybe. A change? Definitely.

But what do you think?

The Subjective Nature of Scarcity

Posted on April 8, 2013 by TheYoungSocrates

‘Mum, I want an iPad too!’, ‘Really?! You’ve got tickets for Glastonbury? Aah…I envy you so much right now!’, ‘You’ve gotten a bonus of 150.000 dollars?! Jesus…well, believe me: in a couple of years from now, I’ve got that too.’

More opportunities and more possibilities create more wants and more needs. Hence it is very plausible that we – the ‘rich people in the West’ – have more unsatisfied desires than the ‘poor in Africa’, numerous of which are starving each day due to a lack of food. After all, we want an iPad, MacBook and iPhone; they only want some bread and water. Hence we are the ones having more unsatisfied needs, thus we are less satisfied than the poor in Africa. Poor old us: it isn’t easy being rich…

Scarcity is defined as the ‘insufficiency of amount or supply’ of a good/service. Note the word insufficiency in this definition, since it is this word that points to the root of the problem. Unlike things as ‘supply’ or ‘amount’ – that are quantifiable and hence (at least partially) measurable or objective – ‘sufficiency‘ is an intrinsically subjective judgement. And the problem with something being subjective, is that it is relative; its ‘value’ is determined by means of comparison to what is going on in one’s surroundings. And if you’re living in a rich environment, an environment in which iPads and MacBooks are within reach for everyone, then this environment is likely to make you want different (read: less basic) goods than you would have wanted if you’d been living in, let’s say, the poorest regions of Africa.

Capitalism is a train, and profit is perishable. Yesterday’s profit is not today’s profit. And it is today’s profit that counts. Standing still is falling behind; you have to keep moving in order to keep your balance. That is the system we’re living in and that is the system we’re constantly trying to prevent from collapsing. Not because we want to keep it on its feet, but because we have to: after all, we are part of the system too, and we have got to make sure that we keep on our feet.

Sure: you could be stubborn and decide not to take part in the ever-continuing rat-race called ‘the economy’. But what then? Where do you – and where can you – turn to? Nowhere, right? You need your money in order to stay alive: in order to satisfy your iPad-needs, your longings, desires and deepest fetish-like obsessions, you have to keep on producing and buying. We’re locked up in a prison: a prison we’re painfully dependent upon.

We could of course turn to communism, an economic system without money. By doing away with money, we might do away with the vicious circle of making each other more horny and horny for bigger and bigger goods. A horniness without an organism to mark the end point of our satisfaction-seeking journey. No money means no satiable goals – or at least no goals that are within financial reach. And no satiable goals would prevent us from having feelings of insufficiency. But communism…hmm…that doesn’t sound very attractive, does it? No: we’d rather keep on hoping for that Lamborghini.

But what do you think?

Nature: The Biggest Discriminator in the Workplace

Posted on April 2, 2013 by TheYoungSocrates

Man and woman: two different ‘types’ of human. The one being the hunter, the other being the caretaker. The one being the fighter, the other being the lover. And there are many more differences (or stereotypes) you could come up with. But one thing is for sure: both types are needed in the production of human life. And another thing is clear as well: the workload isn’t shared evenly between the two types of human. And I’m not talking about workload in the sense of keeping our economy going; in the sense of working and contributing ‘profits’ or other kinds of financial value to society. No, I am talking about the natural workload: the workload we humans have been endowed with by Mother Nature. And whether we like it or not, women are the ones carrying the burden. And the reason for this is as simple as it is unfair: men can’t get pregnant.

Surely: we should strive for a society with equal rights for men and women. Surely: we should try to make sure that men and women get equal opportunities in the workplace. And surely we should make sure that no-one would be denied any job solely because of the ‘type’ of human he or she is. However, the truth of the matter is that we cannot equalize nature. By that I mean that we cannot make men carry babies and we cannot make women not carry babies. The implication of this damn obvious fact is that there will always remain a (big) difference between men and women; a difference we cannot solve by non-discriminating policies in the work space.

So – given this observation – isn’t it (more) understandable why women occupy merely 14.3 percent of the executive officer positions in Fortune 500 companies? And given this observation, isn’t it (more) understandable why merely 16.6 percent of board seats are held by women? Maybe these low numbers don’t originate from a sense of discrimination by society; maybe they come up from a sense of discrimination by nature. And by that I am in no sense implying that women couldn’t be capable of reaching a representation of (at least) 50 percent in each of the aforementioned positions. I am only saying that it isn’t weird that women seem to have a harder time balancing their working- and private life. Especially when they’re pregnant, an ‘event’ preventing them (at least partially) from (temporarily) continuing their job-related obligations.

The consequence of this is that full equality, in the sense of equal representation of men and women in whatever kind of boards, might be an illusion. And again: not because men are better than women; because that is in no sense the case (just as women aren’t better than men). But simply because nature has put a burden on women; a burden that can’t be equally shared between them and their husbands.

But what do you think?

Swearing Bankers: Is That Going to Make any Difference?

Posted on March 28, 2013 by TheYoungSocrates

Bankers want to make money. And that’s okay, right? Everyone wants to make money. But they should do so in an “ethical” way, right? They shouldn’t screw each and every customers just in order to gain some extra profit. No, they should be nice guys. They should respect the interests of their customers and not – for example – gamble with their savings and pensions. However, it is not always easy to respect the customers’ interests and make money at the same time. Sometimes it is just way easier to go straight for it; to take every (doubtful) opportunity to make money. And – as we have seen with the big crises that have occurred (or are still occurring) – “greed” can have negative effects on society. Governments need to step in with “their” tax money to save the day because, as they say, the banks are “too big too fail“. That is, it its much cheaper for the governments to pay “some” money to prevent the banks from collapsing, than to let the bank collapse.

It seems fair to say that banks keep us in an (economic) stranglehold; we can’t do anything but give into their wishes. They are like our big silly brother that holds the family fortune but likes to live the good life; buy drugs, drinks, smokes etc. So if you don’t watch him closely, the money will be gone (“Aaaaand it’s gone“, South Park, anyone?).

So what are we going to do? Just sit back and hope our silly brother won’t make any mistakes again? Or are we – somehow – trying to force him to act “wisely”, without violating the “rules of the free market”? Well, the first option seems kind of risky; so let’s try the second. What can we do? Well, as the Dutch government is trying, we can let the bankers swear to act nicely (link is in Dutch). Let the bankers put their hands on their hearts and say out loud: “we value our customers and we will do anything to prevent them from being hurt”. Well, isn’t that nice?

It it sure is. But will it work? Well, probably not. Because what will happen to the bankers if they don’t stick to “the oath”? Well, then the bank has to decide whether or not the banker is really capable of doing the “banking” job. Really….are we going to put the banks again in charge of what it means to do a good banking job? Then what has changed (again a Dutch link) compared to the situation before the bankers sworn to act nicely? Well, now the government has at least tried to make the bankers act nicely. Now, if they act evil again, it’s not the government fault anymore, right? They have done everything they could, right?

I think we all see that having bankers swear that they will act nicely will not make any difference. At least not without any legal consequences attached to not acting nicely. But the situation might be even worse than this. It might be that the situation after having the bankers sworn to act nicely is more “unethical” than the situation before. But why is that? Well, imagine a bank complying to the “bankers’ oath”. The bank is all acting “ethically” and respecting its customers. But then, suddenly, the bank goes bankrupt. Why is that? Well, the bank was the only bank really complying to the oath; the bigger and “smarter” banks did what they should do: make money no matter what it takes. So, by stimulating banks to act “ethically“, the government itself is acting unethical: they are promoting “unethical banks” (read: banks not complying to the oath) in continuing their greedy actions by weakening the competition of the “sweet” banks. That’s not really nice, is it?

So what’s the lesson we should learn from this state of affairs? Well, two things: first of all, governments that want to promote ethical behavior have to set firm rules – not just oaths without any legal repercussions – if they want to promote ethical banking behavior. And secondly, how can can we ever except companies – and especially banks – in a capitalistic society to act nicely if this acting nicely goes against their profit making interests? There aren’t charity organizations, are they?

But what do you think?

An Unequal Distribution of the World’s Wealth: Is It Fair?

Posted on March 27, 2013 by TheYoungSocrates

50 percent of the world’s wealth is owned by 2 percent of the world’s (adult) population; the bottom half of the world’s population barely owns 1 percent of the global wealth; 10 percent of the population account for 82 percent of the world’s wealth; Africa owns 1 percent of the world’s wealth, while Europe and North America account for respectively 30 and 34 percent. These are figures, and figures don’t lie. So: what to infer from these figures, or more importantly: what should we infer from these figures? One thing is for sure: the world’s wealth is not fairly distributed, or at least not in an economical sense.

I am not going to make a plea for worldwide communism, in the sense that the world’s wealth should be distributed equally among all of its inhabitants. That would be unfair, right? To have people working to pay for other people’s laziness? No, that doesn’t seem to be the optimal option. It could work, of course, if everyone of us would be prepared to work his ass off in favor of a more prosperous world overall. But we don’t want a world that is more prosperous ‘overall’: we want our wallets to be filled with more prosperity; we want to make sure that we are fairly rewarded for our contribution to society (or the world for that matter). Because, as is the case with the worldwide pollution and exploitation of fossil fuels: you can play the nice guy but, in the end, the nice guy will get screwed by the more selfish – or more intelligent; depends on your perspective – people. The prisoner’s dilemma seems unsolvable in a world like ours that is crowded by insecure people; people that see each opportunity to cooperate as an opportunity to be screwed.

Nonetheless, I want to trigger your imagination with the following (unrealistic) idea: what if we could take the world’s total wealth as it currently is and divide it by the total number of people living on this earth, and give every individual this average amount of wealth to start their lives with. See it as a kickstarter: when you are thrown in this world of ours, you will be given some certainty; a buffer, so to say. You can decide for yourself what you want to do with your buffer; you can spend it on drugs, or you can use it to start your own business; you can decide to buy a car that you don’t actually need, or you can save your buffer money for buying a house later on. You can even bundle your wealth with the wealth of others in order to create bigger and collectively shared goods (like roads, schools etc.)! It’s totally up to you.

In our world this ‘starting amount’ of wealth would be 26.202 dollars. Note that this is wealth per capita and not income per capita. Income is nothing more than a temporary reflection of a country’s wealth; therefore a one time change in income will not make much of a difference; not without increasing the wealth (factories, technology etc.) that underlie it.

This ‘wealth sharing kick-start idea’ I’ve presented can be though of as a variation of John Rawls’ idea of the the veil of ignorance. This is a well-known philosophical thought-experiment, that goes (more or less) as follows: imagine that every person on this world wouldn’t have been born yet. All of us would be standing behind some kind of curtain separating us from the earth that we are about to enter. We don’t have any idea about what our own capabilities (where we’re good at) and the capabilities of others will turn out to be when we in fact enter the world. Also, we don’t know what our fate will be: we might become a plumber, but we might just as well become a CEO. All you know is that you have to make one decision now, and that decision is: when all of us will enter earth, what will be the ‘fair’ manner of distributing the income we will come to earn and the wealth we will accumulate? Are we prepared to pay for the medical care required for someone’s handicapped son (which, remember, could be you; you after all don’t have a clue about how you will turn out to be), or don’t we find that fair? And if we would find it fair, how much money would you be prepared to lay aside for these expenditures? Again the question is: what is fair?

Rawls’ message with this veil of ignorance is that, if everyone of us would imagine him or her standing their, behind the veil of ignorance, we might come to notice what a truly fair world might look like; irrespective of our own particular situation. Like any thought experiment, one can debate whether it would even be possible to think about ‘how the world should be’ without knowing anything about yourself or the world. Let’s however, for the sake of the argument, assume that we could. Now I ask you: what would you do? Would you commit to the wealth kickstarting plan, or would you gamble and hope you will become the next Bill Gates?

What do you think?

Financial Markets: Keeping Up the Illusion of Confidence

Posted on March 26, 2013 by TheYoungSocrates

Financial markets are trading grounds on which not products but ‘packets of confidence‘ are exchanged. Do you dare to face the uncertainty, or do you rather pass the opportunity to some guy more manly than you? Who is the 21th century knight, galloping over the battlefield of fallen companies, always leaving just in time not to get hit by the sweeping sword of bankruptcy, but just long enough to receive the fortune and fame? Who has got the balls to take the risk? That’s the question.

A financial market is a special market. In contrast to ‘normal’ markets – markets at which tangible goods like tables or computers are traded, or services like car-washing and theater – this market is build on top of confidence, or at least the perception of it. Surely, through such things as valuation techniques, financial considerations play a more than average role in deciding whether or not to buy stocks, derivatives, obligations or other financial products. However, just as it is in science, there is always a leap of faith required to take the final step: no matter whether it is in jumping to the conclusion on the basis of data, or making the purchase of a stock based upon a ‘reasonable’ level of confidence. No absolute truths and absolute values exist.

Thus – given that confidence plays such an important role in financial markets – you might expect that regulators overseeing these markets will try to do anything in order to keep this fragile little entity up and running. Just like a friend might gloze over the truth in order to keep you – and therefore himself – happy, so a regulator might tell investors that everything is going according to plan; that there’s nothing to worry about. And although lying might be immoral – according to Kant’s Categorical Imperative at least – that’s exactly what he (the regulator) should do, right? If not, the whole house of cards will collapse; investors become (more) insecure and run away as fast as they can. So you need a Santa Claus kind of figure; someone who, above all, should be trustworthy; someone who, no matter how naughty you have been, will always be there to comfort you. Of course: it wouldn’t mind if he or she would have at least some understanding of financial markets, but that’s just only a bonus (you get it? That was a joke).

So, what would happen if, instead of Santa Claus, you would put a politician in charge of regulating the financial markets? A guy like, let’s say, Jeroen Dijsselbloem? A guy who says that, ‘If the banks can’t do it, then we’ll talk to their shareholders and bondholders, we’ll ask them to contribute in recapitalising the bank, and – if necessary – the uninsured deposit holders.’ Then shit is getting messy, right? The insecure investors, longing for a pat on the back, or at least a little sympathy, start running; like Forrest Gump, the investors get the sign to ‘Run, investors, run!’

Honesty is not appreciated in financial markets, so don’t even try it. Lie as hard as you can. Do everything to keep the rat-race going. Do all that is required to ‘restore the confidence in the financial markets‘; be the 21st century Machiavelli. Don’t listen to the crowd yelling that the banks must bleed for their sins. Just assure that they – the crowd – will get their money back. Illusion leads to confidence, and confidence is king. So lie as hard as you can mister regulators; Go for it!

But what do you think?

The Coercive Power of Money

Posted on March 20, 2013 by TheYoungSocrates

The Webster’s New Collegiate dictionary defines ‘to coerce‘ as ‘to compel to an act or choice’, or ‘to restrain or dominate by nullifying individual will’. We all have some kind of idea of what it means to coerce someone: to force someone into doing something they don’t necessarily want. When I hold a shotgun to your head, and tell you that you should give me your iPhone, that could very well be interpreted as an act of coercion. But there are also more subtle acts of coercion. If you told me a secret, and we would get into a fight, I could force you into doing something by threatening to make pubic your secret. But there are even more subtle acts of coercion. Acts that all of us experience on a daily basis. And the leading actor in this play is omnipotent and all-known: it is Mister Money himself.

Where does voluntary engaging in a deal stop and coercion start? When you offer me 300 dollars for me to repair your car, I could voluntarily decide whether or not to accept your offer. I might feel forced to do so, since I am short on money, but I am still able to compare the pro’s and con’s of your offer and come to a rather autonomous decision. It becomes a different story when I am an employee of a car repairing firm where you turn to for getting your car fixed. In that case I have no vote in deciding whether to accept your offer. That’s the boss’ decision: I just have to do as he says. But you could still claim that I voluntarily decided to go work for the company, so in that sense my ‘forced decision’ to repair your car would still be voluntary. Note that you could doubt these two examples of ‘voluntary’ action by claiming that, although in theory I might have decided whether to take the job or not, in practice I was more or less obliged to do so. I might have needed the money in order to stay alive, which could have forced me into accepting the job. But Iet’s not focus on that.

Because I want to provide you with a different case, and that is the following: imagine that a big construction company decides to build an apartment block next to where you live. Now I ask you: how much of a choice do you have in accepting this deal? Not much, right? Even though you aren’t offered any money, or anything for that matter, you are still supposed to accept the company’s plans. You have no authority at all. Your ‘individual will is nullified’ by the domination of the construction company. Thus it seems that money can force you into accepting an offer. That is, when parties engage in a deal, even though this deal might be executed voluntarily by the offering and accepting party, the will of other parties is rendered irrelevant. It’s nullified. And although this might not be a big issue if the deal is relatively small (like your neighbor buying a new car), the consequences can be much more severe when the parties involved are big and powerful (like the construction company and the government).

So it seems that money truly is power: coercive power.

But what do you think?

The West versus The Poor: Who is in Charge?

Posted on March 14, 2013 by TheYoungSocrates

We need oxygen. We need food. We need shelter. We need money. We need so many things, just in order to stay alive. And for as long as we are alive, we are involved in this exchanging relationship with nature. A conversation that we always try to pull in the direction that is best for us. And we have become pretty good in this. We can use nature’s trees to build our houses, we can use nature’s oil to fuel our cars and we can use nature’s drugs to pleasure ourselves. However, there is one natural resource we have difficulty mastering: the human resource.

The human resource is just another resource we need to say alive. However, in contrast to the passive part of nature, we have to be a little cleverer in our approach of the human resource. We can’t just reap the benefits, move on to the next one, and start all over again, right? No, because – in contrast to potatoes – human resources are autonomous; or – in contrast to potatoes – humans understand that they are autonomous. So we have to be smart; we have to use our intellectual super powers nature has endowed us with in order to trick them; in order to make them do what we want. And Bam! There it is: civilization is born.

But let’s – for a moment – shed of the norms and values society has poisoned our brains with; let’s for a moment imagine that we are starting from scratch, and let’s think to ourselves: what would be the best for us? That is: what would be the best for this collection of “Mes” (plural of “me”). What if we could just cultivate people like we cultivate grain? To just have acres full of them, use them when we need them, and move on to the next round? To only extract value without giving anything in return? To use their powerlessness and dependence on us as being their only need we have to fulfill? That would be great, right?

Okay, back to reality: because, aren’t we in fact already doing this? Using the powerlessness of our fellow human beings for our own benefit? The most striking example would be of those people working their asses off in some kind of sweatshop in Vietnam, or any other “less-developed country“. Aren’t we just using their dependency on us – on our money – as being the only reason they don’t leave us? The only reason that they don’t die? Just like grain depends on our water and our fertilizer in order just to stay alive? Aren’t they just as interchangeable as resources like grain and potatoes are? After all: does it matter what piece of grain we put in our bread? And does it matter what Vietnamese made our shoes? The only difference might between grain and Vietnamese is that the Vietnamese might have more potential than the average piece of grain.

But that’s how we want them; vulnerable and fully dependent upon our money just to stay alive. Because the more dependent they are, the less they need. The less they have, the more they can provide us with. And you know what is the best part of all of this? We think that we are fighting the good fight; that we are helping those poor people to stand on their feet. After all, if we wouldn’t be there, those people would have nothing, right? They would die, they wouldn’t be able to take care of their families etc etc.

But is that true? What about those hunters and gatherers we descended from? They seemed to do pretty good without sweatshops, right? They seemed to live a rather autonomous life; not dependent upon “the West” for them to feed their families. Isn’t it that we are in fact preventing those poor people from standing on their own feet? That we are providing them with the illusion of wealth; the illusion of their dependency on us? Aren’t we just rationalizing our immoral behaviors because – in our hearts – we feel that “we are just good people”? Aren’t we changing seats; aren’t we the ones that are dependent on them? And aren’t we the ones that should prevent them from discovering their autonomy? Aren’t they the ones in charge?

Or as Rousseau once said: “Man is born free, but everywhere he is in chains”. The only question is: who are the guards and who are the prisoners?

What do you think?

The Difference between Economic- and Real Demand

Posted on March 6, 2013 by TheYoungSocrates

Both of my grandfathers were farmers and so are two of my uncles. The other family members are all in some way related to the agricultural business. That’s how I – in one of our annual family gatherings – winded up in a discussion with my farmer-uncle about the current state of the agricultural business in Europe. He told me that the farmers – including himself – had to pay wholesalers – which are the parties farmers should be selling their crops to – for them to come and pick up their crops. So: instead of getting paid for cultivating their crops – which seems to be a pretty fair deal – farmers actually have to pay money for them to get rid of their unions, potatoes etc. That’s how low the prices of many crops are these days. And do you know why these prices are so low? Because there is no demand. I repeat: there is no demand. So while there are – as we speak – people are starving in Africa, our farmers have to pay money to get rid of their crops because there would be no demand. This is how far we have gotten in this 21th century of our human civilization.

But let’s take a closer look at the situation: why is there what seems to be a structural oversupply of certain crops? When asking this question to my uncle, he explained to me that the farmers kept on producing this much unions – for example – because they were hoping for some disaster to occur in a country abroad – like a flood in Russia or a drought in Spain – which would make the supply of unions drop, the prices rise and the revenues of Dutch farmers increase. It seems that the act of speculating has crossed the boundaries of the banking sector into the agricultural industry.

However, knowing the farmers’ motives for continuing the supply of unions is not in itself sufficient for coming to understand why there is this oversupply in “the West” and this starvation in Africa. After all, one cannot blame the farmers for trying to make a living, right? So maybe we should put the blame on the Africans. They are after all the ones that are too poor to help our farmers out, right? That’s true, but that is also very twisted. But where to put the blame then? Why is this economic game being played so far away from what we – the human species as a whole – seem to need?

Maybe there is something fundamentally wrong with the economic paradigm. With the economy as being the domain of the profit-maximizing individual. The domain in which the market takes care of itself. The domain of the exchange of goods and services in order for the overall utility of society to increase. Maybe the economic paradigm has lost touch with reality and with why it was invented in the first place: to help us human beings live together peacefully. And since no money equals no goods, and since people are not willing to provide their goods for free, the poor are screwed, right?

But maybe there is a way for the market and ethics to converge. That is: maybe we should stop looking at money as being a universal instrument of valuation and start looking at the goods and services people worldwide have to offer. I can imagine that Africa – because of its climate – has the right conditions for growing agricultural products that are totally different from those being cultivated in the much colder regions of Europe. So why not focus ourselves upon producing and exchanging these goods? No money involved. Just trading the stuff each of the counties is capable of producing with stuff they are unable to produce. We should look for ways in which we – the countries of the world – might be able to complement each other. We have to – as a world – see which countries are – whether it is because of natural resources being present or because of beneficial geographical positioning – most capable of fulfilling a particular task and let each country focus upon performing that task. This is the only manner in which we can fully benefit from the differences that inevitably exist between countries, without ending up in an imbalanced economic situation like we are today. We have all got something to offer each other. That is what we have to realize.

Let’s make this more concrete. Let’s focus upon an example that shows the manner in which different countries could be able to use their regional advantages in creating value. Most of us do agree with the idea that fossil fuels are likely to be exhausted within a couple of decades, right? So that means that we have to switch to other energy sources. Sources like solar energy. And where is an extremely high amount of solar radiation waiting to be caught? A place in which unused space is abundant? Indeed: the African desert.

Think about it. Hereby we could make optimal use of the geographical differences between the world’s countries. In the West we could keep on having “old-school” food-producing farmers, while in Africa there would be an entire new group of “sun-farmers”. This development could turn the idea of what it means to be a farmer upside down. Both types of farmers are producing energy for us human beings. And each of them would focus its efforts on doing what it does best and exchanging these results with other countries.

Sounds good, right? The choice is yours: should we stick to the money-focused, profit-maximizing and individualistic approach currently being applied, or shall we start trying to obtain the most value from the differences that exist on the world and use these differences to create a fair and honest trading scheme.

What do you think?

The Trick of Affection

Posted on March 4, 2013 by TheYoungSocrates

“Beauty is in the eye of the beholder.” Or – to put it less cryptically – affection is fundamentally subjective in nature. In other words: there’s no single true conception of what to (dis)like. Some people “just happen to like” red and other people “just happen to like” blue. And – in contrast to our “knowledge” of what does and what doesn’t exist in nature, and in contrast to our political conceptions – we have no conscious reasons for liking something. And note the word “conscious” in the previous sentence.

Because we might have reasons for liking a particular brand of whiskey more than other brands, or for liking to wear ragged jeans with stains all over them instead of regular and decent jeans. We might “believe” that our brand of whiskey “just tastes better” than the other whiskeys, and that the ragged jeans that we like “just looks better” than the other kind of jeans. And it is this “just” tasting better or “just” looking better that is reason enough for us to buy the product associated with this feeling instead of the other products. It’s after all not our fault that we just happen to like these products, right? It’s just the way it is; it’s our nature. And why wouldn’t we accept our true nature? That would be nothing but a kick in the face of our identity, wouldn’t it?

Can you imagine how easy it must be for a marketer to lure us into buying his product? He only has to make sure that we “just happen to like” his product. Because that alone would be sufficient for us to run to the shops and buy it. And do you know what the best part of all of this is? They can mold us any way they want to. They can keep on promoting their products all day long until that point of no return is reached at which the person “just happens to like the product”; until the person reaches the point that he no longer needs any excuses for buying the product. The point at which the person feels capable of legitimately buying the product he “likes” in order to feed his “affection”. And that’s it. Case closed.

We don’t know how our affections are being created; how they are molded and how they are manipulated. All we know are the end products flowing out of the realm of our unconsciousness and into the shining light of our consciousness. So even though our affections might be kneaded and sculpted, even though we might be indoctrinated and deceived, all of this takes place within our unconsciousness; all of this takes place off stage, a domain that we do not have access to. All we know is what comes out of our very own factory of unconscious longings. And at that point, the point at which the affection enters our conscious experience, we are lost. Because it is then that a little voice inside of our head tells us, “you must not resist who you are. Face it: you just happen to like this product. Go for it!”

And that’s how we came to like those ragged jeans of ours.

But what do you think?

The Link between Capitalism and Wanting to Kill your Neighbor

Posted on February 19, 2013 by TheYoungSocrates

Let’s face it: we don’t know why we are here on this earth of ours. Biologists might say that we are here to procreate; economists might say that we are here to maximize profits; Christians might say that we are here to please God. However, on the level of humanity as a whole, no-one truly knows why we are here. And you know what? We will probably never figure it out, so we might just as well stop trying, right? Why don’t we focus all of our efforts on answering a question that we are actually capable of answering, such as the question: what should we do with our lives while we are here? Or more specifically: do we want to screw everyone around us, or do we want to look for another, more social option?

Let me tell you a short story. This morning I went to the grocery store, for which I had to cross the street. I saw a few cars driving up to the pedestrian crossing, so I decided to wait a second. When the cars had passed, I decided to give it a go. While I was half-way on the crossing, I saw – in the corner of my eye – a car approaching: quickly approaching. And even though the driver had plenty of time to slow down, he didn’t do so. Moreover, he accelerated and almost hit me while passing me by. While the driver passed me, I looked him in the eyes for a split second, and all I could see was a glance of utter indifference; a glance you would have when you accidentally drop your 5-year old phone on the ground. I shook my head and asked myself: ‘Is this the world we live in?’ So now I ask you: is this the world we live in? How come that we are indifferent towards the life of others? Are we just hateful people?

We might very well be, but let’s try to find a different reason; an economic reason, for example. Let’s ask ourselves: what is the economic system we’re living in? There it is: capitalism! Capitalism is an economic system that fosters values such as individual value maximization, efficiency and competition. Those who are the most focused at maximizing their profits are the ones that are (regarded to be) the most successful. The capitalistic system has a tendency to create hatred towards the wealthy egocentric people living on the other side of town. Children are being urged to stand up for their property rights (‘That’s my ice-cream’) and not to trust strangers. And this indoctrination doesn’t stop with the dawn of adolescence. As a student being niggardly is a virtue; being free-handed is just stupid.

Socialism, on the other hand, is an economic system that is characterized by collective ownership of property. The value that your neighbor contributes to society benefits you just as much as his benefits him: his gain is your gain. This implies that it would be reasonable to help each other out. After all: why would you decide to cross the street if that would result in three other contributors to your wealth having to wait? Wouldn’t that – indirectly, via the ‘wallet of the state’ – harm yourself? It probably would, right? This observation makes values like camaraderie and cooperation being valued and fostered in a socialistic society. Growing up in a socialistic society will urge children not to stand up too firmly for their individual property rights, but rather to focus on the property rights of the collective. And, as you can imagine, this would create an entirely different (economical) world.

This article is not a plea for socialism per se. Nonetheless, if everyone could just be a little more social, the world wouldn’t stop turning, right?

But what do you think?

theYoungSocrates

Challenging Accepted Beliefs

Category Archives: Economics

Why Central Banks Are Reaching a Dead End

The year 2025

What then?

Accepting deflation

Why It Is Possible to Make Above Average Returns – Even in Efficient Markets

Commercials: Not All Publicity is Good Publicity

Milton Friedman’s Voucher Plan

Why You Should Always Respect the Dustman

The Difference between What You Get and What You Earn

Why Students from Top Universities might be Worse than ‘Not-top’ Students

Why the High Taxation on Cigarettes is Unjustified

The Inevitable Unfairness of the Free Market

The Changed Nature of Money: From Gold to Digital

The Subjective Nature of Scarcity

Nature: The Biggest Discriminator in the Workplace

Swearing Bankers: Is That Going to Make any Difference?

An Unequal Distribution of the World’s Wealth: Is It Fair?

Financial Markets: Keeping Up the Illusion of Confidence

The Coercive Power of Money

The West versus The Poor: Who is in Charge?

The Difference between Economic- and Real Demand

The Trick of Affection

The Link between Capitalism and Wanting to Kill your Neighbor