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Eureka: A fireside chat on economic philosophy Eureka: A fireside chat on economic philosophy
by Jay Gutman
2018-05-12 07:10:43
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You're at a café discussing the economy with friends. You might be discussing unemployment, inflation, the high cost of life, shortages and maybe sum it all up the the laws of supply and demand.

In this fireside chat, I won't really be discussing supply and demand. I will be discussing some of the more human and cultural aspects of the economy and some of the lighter and darket sides of the economy. How come we like a good hamburger, but don't bother with a good taxi driver? How come we don't expect great hamburgers, yet we expect great plumbers, when great hamburgers are a lot easier to produce than great plumbing. What do emotions have to do with the economy? And why do “invest in my country” campaigns almost always fail? I'll discuss this, and a lot more, in this fireside chat.

ecophoso01_400Why you never see a 20 year-old taxi driver

Every now and them I hear politicians say “my country is going to be the Mecca of foreign investment” or “we are going to launch large scale tourism projects” or “we are going to launch large scale real estate investments.” Or every now and then you will hear a kid tell you “I'm going to start a business, it's going to grow so big, I'll have the house, the sports car and I will date a Victoria's Secret model.” What these people are really saying is “we want your money, we need your money.”

So how come you never see 20 year-old taxi drivers? To drive a taxi you need three things. You need to be a good driver. You need to know the details of the streets of the city and how to get there. And finally you need to either be able to afford a license, or to get hired by one of those many taxi companies. Driving is a skill that you need time to acquire and that you need to constantly practice. To be a good driver you will need to drive almost every day for several years. To know the city you will need to have explored the city several times over, things will be blurry at first before they gradually clear up. To afford a taxi driver's license, you will need to have saved several years' worth of money. If you want a taxi company to hire you, they will want to make sure that you're a good driver and that you know the streets of the city.

So how do you bring people to invest in your country. Or how do you become number 1 at any given product. Or how do you bring tourists to your country. A guy or girl comes to invest, sees what it's like to invest in your country, stays for a few years, for the adventure. They will either have a good story about investing in your country, or a horror story about investing in your country. If it's the kind of guy that's good at telling stories, they will then occasionally visit their home country or business institutions in their home country. They will get phone calls from people curious about investing in that country. Those people will hear the stories, know what they will need to invest in the country, and soon enough will decide whether they want to replicate the success or stay clear of the horror story.

So you'll want honest people who give complete and honest accounts of what it's like doing business in your country. Creating a positive business atmosphere takes years or trial and error. Want to do business in Korea? The bills add up, the market's saturated, you want to be an incredibly social person and meet lots and lots of people for your business to come anything close to success. Join the ultimate frisbee league, a couple of soccer clubs, a couple of tennis clubs and every conference you can go to, go there. In sum, you'll need people to inform people who want to do business in your country.

Same goes for tourism. You can't just start campaigns and say “Come to Iceland!” You're going to need a few adventurers to come visit and have clear and complete stories of what it was like visiting your country. The positive experiences, the negative experiences, what to watch out for. That's when they'll send their people over, who will send their people over, who will send their people over, before soon enough everyone will be visiting your country because everyone else is doing it. Making large scale advertising campaigns costs a lot of money, and only screams “we want your money.”

Sames goes for if you're a company trying to sell a product. A few adventurers will try it out, have positive or negative feedback on the product. They will either encourage other people to get the product, or talk them out of the product. Now you get the idea.

Why self-sufficiency is almost impossible

Imagine that you're a farmer. Perhaps one year you could produce just enough to sell on the market, when the following year you have a huge harvest and more produce than what you know to do with. Or perhaps you have a factory and produce just enough to sell on the market the first year, then the following year you find ways to massively produce and don't know what to do with production. Or perhaps you've come up with innovative production techniques that have put your production through the roof. Or perhaps your product is no longer in demand in your local market, when it is in demand in foreign markets.

David Ricardo's theory of comparative advantage is a theory I tend to disagree with. A lot of economists like and admire Ricardo's theory, perhaps because Ricardo is one of those Jews who decided to make Jesus Christ his home boy. But when it comes to comparative advantage, where he says that countries would gain an advantage from specializing in one product and exporting it while another country exports the product that it specializes in is over simplified. I like that all countries and all markets produce as many products as they possibly can, if weather, climate and raw material conditions apply. This is because each country tends to bring its own touch to the product. Also because people don't just import or export products because they have plenty of them. In some cases the product may have a surplus, in other cases the product is no longer in demand in the country, either because it's no longer trendy or because a competing product takes over, or perhaps some companies even start production with exclusively exporting the product in mind.

Let's take beer for example. France has beer breweries, and is a beer producer in its own right. Some years, beer is the new trend and you'll see people everywhere enjoying a few beers at the local pub or taking a few beers home. Other years, especially in years where there's a good wine harvest and the quality of wine is said to be good, a lot of people will ditch the beer and opt for wine instead. Other years gin and tonic, vodka and whisky will be the norm, before people go back to purchasing beer. Countries where this happens less frequently are countries like the United Kingdom, the Czech Republic, Belgium or Germany where beer tends to be norm and few people would ditch beer for wine. So in years where beer is in demand in France, the French might consume their beer, in years where beer is no longer in demand, they might as well export it.

Another example is where a company brings a new touch to a product and starts selling it, leading to global demand for the product. Korean construction companies used to specialize in breaking world speed construction record, and anyone who wanted a building up and running in three months would call Korean construction companies. But then financial difficulties, mainly prompted by building real estate in ghost towns where the building's value plummeted, meant the new trend was for Korean construction companies not to finsh the buildings they were starting because they were running out of cash. Now people are back to local construction companies for construction.

So there can be several reasons why a country may want to export. A product may have a touch that is not available in other countries. A product may purely not be available in another country. A product's demand may plummet in another country while the demand for the same product may be high in other countries. Or a company can decide to produce a product that is not in demand in their country but that is in demand in other countries. In South Korea, the only common use of breakfast cereal is as a topping on “patbingsu” or a desert made of ice cream, ice and beans with breakfast cereal on top. That means a lot of the breakfast cereal production is exported to countries where cereal is more in demand.

Finally, another increasing export trend is to export local products to countries where there are a lot of immigrants from the country. Korea exports products to Canada and the United States specially aimed at the Korean community, the Chinese do the same around the world, while the Persian Gulf states exports products to Europe aimed at the Middle Eastern community present there.

Financial economics

I've read my share of books on financial economics, which discuss finance in the pure light of financial transaction. Financial information tends to be left out of financial economics theory, that is financial transaction being both information transactions and the information leading to financial transactions.

A lot of companies and countries use what I like to call “garage sale financial economics.” That is, with the intention of making a quick buck or two, a lot of companies and countries start offering every service and product they can think of, with the end goal of filling the often empty cash reserves. As in a garage sale where you put everything you own for sale, a lot of countries and companies will start advertising all sorts of products for sale and hope to find buyers.

Unfortunately, most buyers seek information before, during and after the sale. Before the sale, they either see a product and want to try it out, or during their numerous conversations someone suggests that they try the product out. Or perhaps they saw a product at an event and want to try it out themselves. During the sale, they pay for the product and immediately want to try it out to see how it can fit into their lives. After the sale, they either keep purchasing the product or stop purchasing the product, or may stop purchasing the product and purchase it at a later date.

Finance is as much about a healthy flow of information as it is about financial growth. You have countries and locations where the flow of information is blurred, that is where few people have honest conversations about what products are to be purchased and what products should be purchased. Other countries have healthier information flows, leading to informed decisions on the purchase of products. A lot of countries think that by helping the flow of information, they would give up information to their competitors. But the truth is, by helping the flow of information, they would bring more consumers, because each consumer has their own preference when it comes to choosing products. Not all consumers make highly informed and intellectual decisions, and every consumer makes different decisions. But when there is no flow of information, consumers often don't even know of the existence of the product. In some cases the benefits or usefulness of a product can be misrepresented, which is why the higher free flow of information and feedback on products, the less uninformed decisions consumers make.

For the rest of the fireside chat, I will briefly touch upon the different facets of the economy, how consumers make decisions, how big business makes decisions, and how the economy flows. I will not touch upon the formal aspects of the economy, but on the more descriptive, casual ways the economy can work.

Emotional economics

A lot of people and decision-makers are emotional, and a lot of economic decisions can be made based on emotions. It's not just buying flowers or chocolate that can be based on emotional reasoning, as sometimes huge purchases are made solely based on emotional reasoning.

Koreans have a term for emotional binging on spending and called it “Fuck expenditures” where for example after a long day of work people will take a taxi for long distances rather than take public transportation, or will go to expensive restaurants every day and binge on food after work, despite hurting their budget. Some larger companies can purchase large plots of land, recreational facilities or production units that they don't really need. Kind of like the late Omar Shareef explaining that he once spent 100,000 dollars worth of flowers to be sent to a woman who had refused to sleep with him the previous night.

Emotional economics can also hurt business, as some consumers, governments or companies can refuse to purchase products for emotional reasons. As in 2005 when a lot of Muslim countries forced a boycott of Danish products because a Danish newspaper had published cartoons depicting the prophet, or as in some larger companies or countries refusing to trade with certain countries for emotional purposes.

Personal economics

Economics is largely a matter of personal choice but it is also a matter of obeying or following the choices of others. Some advertising campaigns use high profile members of the elite to promote their products because elites can sell. But technically people tend to follow other people from their in-group rather than celebrities. For example, at one point it was popular among Americans to buy farming land in the Philippines, yet few Americans knew exactly why they were buying farming land in the Philippines. A lot of them did so because other Americans were doing so.

Another trend is when you're in Turkey, you just have to purchase carpets. Few people know exactly why they are purchasing carpets, nor do they do so because they really need carpets. They do so because everyone else is doing so. Economics is rarely a matter of personal choice, and often involves a lot of group and social choices. If you spend enough time in Korea or Japan, soon enough you will find yourself snacking with ramen noodles. If you spend enough time in Turkey or Israel, soon enough you will find yourself binging on sunflower seeds. Not that you like noodles or sunflower seeds in the first place, you do so because everyone else is doing so.

When businesses want to make a product mainstream, or when countries want a large inflow of foreign investment or tourists, they may want to make sure the product becomes part of the culture. If you're French and never travelled to Morocco or Tunisia, you won't be considered as such. If you're a college student and never travelled to Thailand, you might not be considered as such.

Organizational economics

Group dynamics also affect consumer choices. Sometimes people imitate the choices of others, sometimes they decide to do the opposite of what others are doing. Sometimes your boss will say “make 10 million dollars, that's your target” and you will start investing in whatever everyone else is investing in and making money in. If your employees are not smart enough, they might take the 10 million dollar challenge by investing in a social network or internet web browser, when they have much better chances of making 10 million dollars by producing and selling fruits and vegetables. Sometimes countries will say “we need 100 billion dollars” and they will start investing in tourism and exporting electronics, when they have much better chances of making 100 billion dollars by exporting agricultural products and light industry products like textile. More importantly, they will have better chances of striking it big if people produce tasks they are better at doing, rather than producing tasks just for the sake of making money.

So then you have entire economies where investment is based on making money rather than producing sustainable products. In the United States, real estate prices went up considerable and never declined from 1932 to 2007. So a lot of people were investing in real estate rather than selling houses. When the houses didn't sell, they realized they were more focused on investing, and less focused on selling. The difference between a real estate producer and a real estate investor is one who knows his clients. A real estate producer will know that some clients like to play music instruments, others like to have wild parties, others like peace and quiet, others have large families and others want to live alone. A real estate investor is someone who will build a lot of one-size-fits-all appartments and then be surprised that few people want to buy them, because different people have different tastes and needs when it comes to real estate.

Task-based economics

In sum, the economy is about being able to perform the tasks that will eventually lead to production. They could be the financial task of investing, the manufacturing task of producing, the task of selling or the task of paying and buying. It's impossible to completely dominate any task and to know exactly how to perform the task. But the more you know about the task, the better.

Unfortunately, very often people perform tasks they they know very little about. They either perform those tasks because they were hired by cronies or for having attended the right schools, or because companies keep changing their tasks all the time. Some people eventually learn their task, but a lot of times they just freeze and perform no task at all. Other governments and companies force branches to start performing tasks without informing them how those tasks are to be performed, leading to poor results.

Survival economics

Imagine a begger who has to beg his way to find food to put on his plate. They will be all over the place, singing one day, cleaning car windows the other day, going to a shelter another day, then leaving the shelter to beg food on the streets, choose one street then the other, then choose to tap on car windows so people can give them money and so on.

Now imagine a company or a government could be in survival mode. They could have a sales strategy, one of patience and trying to build a network until sales start picking up, or they could just be all over the place and invest in one thing, then in another, then start asking for loans, then getting aid, distributing the aid randomly, improvise, improvise, improvise.

Like anything in life, you can survive if you have a clear common sense strategy for survival. I remember a North American trying to sell English education materials in South Korea, except that he was almost exclusively hanging out with foreign residents in Korea, when the targets of his campaign should really have been Koreans so he should have been networking with Koreans. Another survival mistake I've seen a lot of governments focusing on industry for survival when they should really focus on agriculture and redistributing the income for agriculture. You only industrialize if you have no agriculture at all, if you have insufficient agriculture, or if the income you made from agriculture is so huge that you can start building an industry with the income made from agriculture. Yet another mistake I see is governments sending students abroad because they need an educated workforce. They train engineers who have no industry to come back to.

Solidarity economics

The economy is not just about survival. Some companies, governments and individuals spend a lot of money on solidarity. Either by helping fellow employees, or by helping causes outside the realm of the organization. Of course solidarity should start with yourself, your company and your country, but a lot of organizations give to other organizations and people in need without really helping their own people. I remember South Korea pledging developing countries millions of dollars, when the country barely has a welfare system. Some companies donate lots of money to charity, yet pay their employees starvation wages.

Some organizations also fire people or reduce budgets so they can focus more of the budget on charity. I remember, again South Korea, firing thousands of teachers so they could focus the budget on welfare. The problem is suddenly those teachers they fired were also in need of welfare, and so was the entire community built around teachers, such as the book industry and some pubs that were highly frequented by teachers.

Altruistic economics

Some organizations will be set up merely to help others, or some individuals will volunteer their time, sometimes their entire time, to helping charitable causes. They are often organizations run by individuals who have money, but who see no point in making more money and want to spend the rest of their life helping other people.

The question is, what kind of help do people really need? If you give them money, you feed them for a day. If you give them food, you feed them for a day. If you teach them skills, they might not be able to use them. Let's say all those charities dedicated to opening schools around the world to train an educated workforce. Again if you train engineers and that they have no industry to go to, or train doctors and that they have no hospital to go to, or teach people English or French and that there's no other place for them to use the language than France or the United States, you might as well take them directly to France or the United States and train them there.

Some organizations train other organizations in agricultural techniques, industrial techniques, technology or other practical skills. The problem is such societies are often hierarchical and tend to distrust and dislike change, so you really need the blessings of those in charge of such societies to make the project work. Plus aid workers are often welcome as guests, meaning the tend to be welcome the first few days, but then they gradually start being seen as intruders within the organization and will be treated with distance as the days go by.

Narcissistic economics

You have the Athenian model of economics, and you have the Spartan model of economics. Athens in ancient Greece wanted to build a strong legacy and wanted the city to remain important throughout the ages. 3,000 years on, it's Greece's capital, in part thanks to all the edifices that were built there. Sparta thought about being a strong economy, but did not bother with the legacy. I visited Sparta in 1997, it's now called Isparta and located in modern day Turkey, and saw no traces of Spartan civilization, just your average Turkish city. Had it not been for former Turkish President Süleyman Demirel being been born there, I don't think I would have bothered visiting the city.

So it's only natural for a lot of people, orgnazations and countries to try to work on their legacy so the wealth, richness and prestige can be passed on from generation to generation. People, organizations and countries want to win prestigious awards, want to establish memorials, want to build large buildings, want to be visible so the wealth and prestige can be passed on.

But one mistake I do see is a lot of individuals, organizations and nations spend so much money on building their legacy that they end up with very little money for anything else. You may have heard about all those former glorious athletes who went broke because they were spending a lot of money building their legacy. Or perhaps organizations who bought so much land that they had little money left to invest in projects on the land. Or countries who built so many landmarks that there was no money left in the tourism and other projects involved in dealing with legacy.

Formal and informal economics

There's a formal side to economics. GDP, growth, inflation, deflation, unemployment rates, export to GDP ratio and so on. Those figures are important. Yet some countries, despite showing strong formal figures, seem to struggle with keeping and maintaining growth, while others seem to struggle with income redistribution, while others seem to struggle with business competitivess.

The informal side of economics is the human side of economics. Rules can favor one party over the other, while culture can favor one party over the other. Let's look at the NBA analogy. In the 1990s, the NBA had very strict rules on fouls, and as soon as you touched a player it was considered a foul. This played in favor of physical players like Shaq, Shawn Kemp, Scottie Pippen, Micheal Jordan, Clyde Drexler or David Robinson. But the the rules on fouling players loosened up, and suddenly this caused phyical players to be less dominant, fewer dunks, and more outside shooting. So sharp-shooting players became dominant in the NBA, and dunks have become rare, few and far between.

The same could be said about the economy. Sometimes the big players are favored, but then governments or culture come up with rules that favor smaller companies. Sometimes it's just the skills needed by smaller companies which are not advanced, while other cultures promote the consumption of the products of smaller companies. In some cultures not owning a big brand car or phone is a big deal, in others it's not a big deal. At times not owning big brands can be a big deal, but over time not become that much of a deal. That is rules and culture affect the economy over time.

Corruption and economics

Of course corruption exists, and it's the norm in some survival economies. Survival economies have to make money through whatever means they can, and don't always have control over how to spend the money much less how to receive the money, nor do they have institutions or mechanisms to control how the money is being spent. So it's kind of like the beggar who begs for food but ends up spending the little money they made on alcohol or drugs. Not a good long-term strategy, but takes care of short-term fixes.

In any economy you have individuals. Then you have the government and its institutions. Schools are government institutions, public banks are government institutions, some research centers are government institutions and so on. Then you have quasi-government institutions which are institutions technically not part of the government but who work in close coordination with the government. Some business constortiums or organizations can be considered quasi-government institutions, along with some labor unions and so on. Then you have non-government organizations which can either be political parties or political organizations or social organizations which play no part of the government. Then  you have legal and illegal businesses, finally you have associations and interest-based organizations such as religious organizations or fan clubs.

Corruption can take various creative forms within such organizations, including governments extorting money from NGOs, businesses extorting money from the government, the government extorting money from businesses, the list is endless, and any combination or combinations are possible.

Totalitarian economics

The idea is how much control individuals, organizations and governments have over the economy. In some countries ideally it's a free game, and you can buy or sell whatever you want. In other countries, in fact in all countries you need all kinds of authorizations to make all sorts of purchases. Some of those authorizations can be arbitrary, others can be meant to prevent problems from happening in the economy. Others are meant merely for the government or for organizations to remind everyone that they are in charge, that they are at the mercy of the government and that they need the government's authorization for everything.

Was there ever a neo-liberal period? I remember in 2014 and 2015 everyone was talking about neo-liberalism, as in the supression of laws regulating trade and investments. I'm not sure that's what it was. What is was, if I recall, was a lot of Chinese and Korean enterprises making all sorts of mega-investments in a large number of countries with little or no say from local governments. It was also a number of countries from the Persian Gulf purchasing land and investing in mega-projects with little control from local governments.

What happened next? Few of those projects worked out, and they mostly created ghost towns and abandoned warehouses around the world. Most people still need authorizations from their bank to withdraw large sums of money.

Conclusion: The 20 year-old taxi driver and the 60 year-old sales clerk at the brand clothing store

I once took a taxi and the driver was 20 years old. I asked him what his story was and he told me his father had been a taxi driver. I also once went to a big brand clothing store and saw a 60 something year old sales clerk, who happened to be a man and well-dressed at that. He smiled a lot, and I couldn't resist asking him how he got the job. He told me he had been a sales clerk at smaller clothing stores, mostly formal clothing stores, but that business in formal clothing stores was slow and that he had a better shot at stability in a larger brand clothing store. I must say he was spry for a 60 year old, and I couldn't help noticing his hair dyed in blond. He was married to a much younger woman, and I had to make it clear to him I was asking questions for research purposes and that I had a girlfriend of my own. 

I remember an art teacher telling us each time we asked about grades “if you draw for the grades, that's like working for the money.” Human relations and getting the task done are as important for the economy as making money. But in the end, I'm not done meeting my share of people who come up to me and say “I'm doing this for the money.” These people are individuals, companies, and yes, governments.

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