The future of capitalism

From a McKinsey Quarterly interview ... one of the best articles i've read in a long while:

The Quarterly: Capitalism has just taken a beating. What will the future look like?

Richard Foster: The essence of capitalism is capitalizing—bringing forward the future value of cash to the present so that society can grow more quickly by taking risks. It goes back to the Dutchmen in the 16th century, sitting at their coffeehouses in Amsterdam and Leiden, loaning each other money for a guaranteed return. Someone said, “I’ll give you a little higher return if you give me a piece of the action”—and equity was invented. That had the effect of bringing forward, into real cash today, the net present value of future earnings. That levered society and allowed it to grow at a much higher rate than it would otherwise have. Equity was a very clever invention, and we are not going to give it up. This is the way people are. This is the way commerce works and will continue to work unless capitalism ends. And that won’t happen, regardless of what you read in the press.

Special dedication....

.. to the readers of the previous post: I know for sure some of you will enjoy this:

French "workaholism"

For quite some time now there is a debate in France about whether or not people should be allowed to work on Sundays. According to the current law (adopted in 1906!!), working on Sundays is forbidden, so as to ensure any employee a minimum of 24 consecutive hours of rest during the week. However, certain derogations are possible: for example, companies producing perishable goods or working with perishable inventories are allowed not to interrupt their production cycle; hotels, museums, other leisure companies, hospitals and a number of pharmacies to ensure minimum service can also work on Sundays. Little grocery shops can only stay open until noon, and big supermarkets have the right to stay open 5 Sundays per year. However, a new law is waiting to be passed this month or beginning 2009, which aims to relax this system a little, though clearly stating that its purpose is "not to generalize working on Sundays".

This regime is actually pretty strict as it is. I remember this was one of the things that shocked me the most when I first started to live in France: when you go out on a Sunday, everything is closed, the streets are deserted and you can't even go shopping because all the stores are closed. About the only things open are pubs (in the evening.. and still, some of the good ones are closed on Sundays!) and cinemas. Coming from a city where I had grocery shops open 24/7 at the corner of my street, I was used to just go out and buy ice cream at midnight if I felt like it. I was also used to everybody being outside, shopping, going out, roaming the city streets on Sundays. Adaptation took me a while, since I'm not a very organized person by nature, and more than once I was left with nothing in the fridge on a Sunday, and I had to wait until the next day to do my shopping. Eventually, with a little organization, one can manage, but I'm straying away from my point with this post.

I am actually writing this because I find it funny and quite unbelievable that people can talk over such a law: I thought one of the constitutional rights of the citizens was the right to work. Indeed, they also have the right to rest. These should however remain rights, not obligations, and every person should make this decision by his/her self, as opposed to things being settled through a law. Imposing people not to work on Sundays is equivalent to violating their right to work. Take for example a souvenir shop: its revenues are dependent on tourism and tourism usually occurs during weekends. Not allowing its owner to work on Sundays automatically cuts its revenues in half, because he cannot take advantage of one day out of two which are profitable for his business. I bet he would prefer to rest on Mondays instead, and I bet he would prefer to have that choice, and not leave the French state decide for him.

Other than being a sheer violation of a basic human right, I also feel this outdated law pulls French economy down, in a time of harsh economic conditions when what business needs most is flexibility to quickly adapt to the market. Liberalizing work on Sundays would actually reduce unemployment, raise household's revenues, increase the GDP and the state's budget and re-launch the economy's dynamics. How? Well, to start with, it will help lower unemployment (or at least partly offset the negative trend as a result of the current crisis) because 1) having the right to open on Sundays might make profitable some businesses that weren't before, and thus there will be new business creation and the entrepreneurs will either leave their current jobs to start-up a company, or they will come directly from the ranks of the unemployed and 2) it will create new jobs because of the need to work in shifts, or because businesses make more money and can expand their activities by hiring extra people in other departments.

Secondly, it raises household's revenues because as we have seen with the example of the souvenir shop, some people may make extra profits, and also because people can choose to work an extra day if they need it. Not only this, but it will also have a positive effect on their revenues due to the multiplier effect in the economy.. but I will talk about this later.

Thirdly, opening businesses on Sundays means making available an extra day for consumption. This is even more relevant as we see Sunday as a day of relaxation, when people are likely to make discretionary purchases. This would thus allow businesses to tap more into the revenues of consumers, as the latter will have more time to spend in their shops and more opportunities to buy. Just as a simple example, I might be very busy during the week and work long hours, so I will probably not have time to shop, or go to the hairstylist, or go out in a pub during the week. On Saturday, since it is my only free day when some boutiques are open, I'll probably run all my errands and fill up my frigde.. and do some clean up around the house as I don't like to do that on Sunday (since I see it as a day of relaxation). Therefore I probably won't have much time to do these things on Saturdays either... or if I do, then I'll have to give up on something else, like doing my shopping or posting a letter. In this way I am actually limited in my consumption by time, and not by my budgetary constraints or my willingness to purchase. This is obviously a sub-optimal situation, as I would have more utility from being able to consume all I had planned to, and as the overall business might benefit more from fully tapping into my available budget. This is where the multiplier effect comes in: the more money circulates in the economy, the greater the wealth created due to the multiplier effect . If money rotates slower, for example because I cannot spend everything I planned to in a certain time frame, then part of this effect is lost. As businesses would increase their revenues by working on Sundays, this will contribute to a higher GDP. Also, as more transactions would be made if Sundays were also available for work and therefore, for consumption, the state budget would also benefit because more VAT will be paid. Businesses will be able to keep producing on Sundays to better meet demand, even if they are not part of the currently exonerated categories. As they'll become more profitable, they'll either hire more people or raise the salaries or their current employees, which again would lead to an increase in household revenues.

Now, to answer the socialists defending the current status quo... I feel that by liberalizing work on Sundays the changes on the say to day social life will not be that dramatic. There will most likely be a reorganization of activities and a shift in the patterns of consumption: some people (but not everybody!) will probably start shopping on Sundays and take advantage of their Saturday to go out. Businesses will not generalize working on Sundays, firstly because for most businesses this doesn't make economic sense. If they do not have a strong enough rationale (such as lost revenues or lower competitiveness due to not working one day) they will not open on Sunday. Especially since an important part of transactions are B2B and overall the consensus in society is that Sundays are the days for rest, companies which do not offer services directly to the customer will probably not open because they would not have who to do business with. This is how, actually, the right to rest on Sunday is protected by society itself, without the need for a law that induces even more rigidity in an economy that is already too regulated as it is.

Not to forget that people deciding to work on a Sunday will most likely get another day of rest during the week, which might actually be an interesting agreement for families with children for example, allowing one of the parents to stay at home while the other one is at work, and thus spend more time with the child. This is also what i would use to counter the left parties' argument that working on Sundays and leaving children at home alone would lead to a surge in juvenile delinquency ...

All in all, I feel that it would be beneficial to completely abandon this 100-year old law altogether, but adopting the changes proposed (which are actually only allowing more derogations) is a step forward... especially since in today's dynamic world, both businesses and individuals are seeking flexible schedules and work arrangements. So, why shouldn't one have the right to work on Sundays, as long as it stays a right and not an obligation?...

To Blame Or Not To Blame... The Beggar

Last night it rained again, reminding me of the two weeks of rain we had at the beginning of November. As I was walking home on my boulevard, under my umbrella, an image came back to my mind, from a couple of weeks ago. I was at that time pretty moved to see a beggar sit in the pouring rain against the wall, bare-feet, on the wet sidewalk.. hiding himself and all his possessions under a ragged umbrella, the only thing he could call "home". I can only remember how eager I was to get home and sip a hot tea that day... It is in times like these that you realize the importance of having a roof to hide under, and a place to call home.

I keep wondering since that moment what makes him stay on the streets and face such a rough existence. Is it a choice, or does he, in fact, have no alternative? Did he personally make the choice not to work or was he forced to become a beggar because the labor system could not integrate him?

As an economist, I stick to the libertarian principles and believe in the power of "the invisible hand". But in this case, I wonder... can, at least, an almost-efficient labor market exist? Or is it doomed to inefficiency, by its inherent nature? Could my friend there, the beggar, find a job if he really wanted one? Or, if not, what can he do when confronted with such structurally inefficient labor markets?...

Let's look at the situation more closely. I now live in France, a very developed country where people are usually nice and helpful to each other in public, regardless of circumstances, social differences, sex, handicap, etc. However, its labor system is highly discriminative: even smaller things, like not being French (even if you are European!) will play against you in the recruitment process (this, despite the fact thatUE is supposed to stand for free labor mobility and a unique labor market for the member countries). Therefore, it's no wonder that discrimination based on nationality, skin colour, name (yes you read that right.. recruiters look at your family name when they decide whether to invite you to an interview or not), the reputation on the schools you graduated, and what not, are common. Given this situation, I can't help but wonder: how can my friend there get a job when the market discriminates so heavily on criteria which have nothing to do with actual performance on the job? How many cases aren't there, especially in France, of families moving in and not being able to get a job because of this? Thus, not being able to get a job, not having enough money to go back home, they end up on the streets.. the French state, desiring to ensure a minimum level of life for everyone, will start subsidizing their existence, which will have a negative impact on the perception of the population regarding these "street people". This, in turn, will only increase discrimination... creating a vicious circle.

I'm not saying that there are no beggars by choice - sure there are... I am not saying that what the French state does by subsidizing everyone is good.. far from it. I am just wondering whether a free (or at least pretty much liberalized) market, not sustained by government through unemployment payments, can have the means to deal with such structural deficiency. This market failure has nothing to do with information asymmetry, nor with externalities, nor with problems of supply and demand.. it is founded on irrational behaviours embedded in the conscience of economic agents. Can the free market devise a mechanism to interfere with this irrational behaviour and bring it on the right track?


*** This view might also explain why some countries have more efficient labor markets than others. For example, the unemployment level in the US (pre-crisis) was rather low because the population is very diversified and therefore there is less discrimination, whereas in France where people are very nationalist and protectionist, the unemployment is one of the biggest in Europe.

Le Classique Dans La Rue

Today Massena greeted me in a special way: not with break-dancers, not with street commerce, not with arts people... but with music. The clear, subtle yet powerful sound of a piano filled up the air, drowning in its music thee sounds of everyday life. The usual cars driving by, the noise of the workers revamping the facades, the familiar bell of the tram, the continuous buzz of people talking to each other... these were no longer simple sounds, they were part of a classical music concert. Music that a very talented young man was playing passionately on an old piano that he had installed on the square.

I don't know how much it lasted, nor how much I stayed there, mesmerized, listening to him; all I know is that when I left I was smiling, feeling invigorated, at peace with myself. This is why I love Nice -- for the sweet improvised surprises like this that you get every day.

[written on Nov 10th.]

Children of Fate

When I was in high school, I once asked my math teacher, who was extremely demanding (he was training the Romanian Olympic team) what he appreciated more: gifted children, with a natural talent for math and superior intelligence, or hard-working students who achieve results through relentless exercise. He answered he would always appreciate the latter, because they spare no effort to achieve results, while for the others, this comes more or less naturally.

I still think about that now, and it holds true for me too. I think it is to those that through their own efforts and against all odds, manage to outperform their potentialities, that this world should belong. And instead, we often value more the others, gifted by nature, which is remarkable indeed, but that are not necessarily as motivated or do not necessarily pursue their dreams with such fervor... They, the ones that overcome their chances, that fight with all they have to achieve their dreams, are the true winners of this world, because they prove to us that nothing is impossible.

I just watched Gattaca. The message that this movie conveys is much more profound than what can be presented in 1h45, still I think the film is remarkable. The passion with which Vincent pursues his goal and is ready to risk everything to be even "5cm closer to the stars" is what determined that 1% chance of success to come true. And at the end, when I saw him actually climbing in the spaceship, I could still not believe that he actually succeeded.

It's the children of fate, the children of chance, the imperfect ones, that are to be admired - not programmed perfection... with it, you have no more surprises, you cancel out nature's sparkle, you kill evolution. If everything is given, then what more could you achieve, as a human? Where would be your merit for all these achievements, your satisfaction once you made your dream come true? I always felt that our humanity is in our aspirations, ideals and goals, and in the endeavors that we are ready to spare to accomplish them.

"Consider God's handiwork, who can straighten what He hath made crooked?"

I say Man, because God gave him the means.

Money or Power?

Money or Power, which would you choose?
This was a very interesting question that our strategy teacher asked us, which made me ponder. The point was to determine what kind of shareholders we would be: those that are interested in voting rights in a company, or those that are interested in dividends. I chose the latter category. But, in the absolute, which is more desirable, money or power? In a true economic spirit I tend to say money, because money can ultimately buy you power. But, on the other hand, once you have power, you can generate money. Which was exactly why the answers in the class were about 50-50. But let's make a pure analytic exercise and look at this in more depth:

How can we decide which of the two is the most desirable? If one can bring you the other, then the only relevant criterion is the sustainability of the respective positions. If by having power you can ultimately get money, and if by having money, you can ultimately get power, in the end you will achieve the same benefits. Therefore the only thing that can distinguish between the two is sustainability: for how long can you hold that position? Is any of the positions invulnerable, or less vulnerable?

Let's look at power first.
We'll assume you have absolute power over a rather large group of people, for example the power of a king over his people. The highest power you can have is to be the kind of the most populous nation, because a position of "king of the world" would not be sustainable on the long term. (Because one individual cannot hold this power for a long time due to limited rationality and huge control costs that the very large number of subordinates would imply. Eventually he would lose this power to newly formed groups of interest).
Therefore, as king, you have unlimited power over your subjects: you can make them do whatever you want them to do, you can take away from them anything they have (no property rights) and you have the right of life and death over them.

Under these circumstances, your power basically derives from 3 sources:
a) from fear: your subjects submit to your will because they fear you and the repercussions they might face if they disobey;
b) from love and respect: there will always be that group of people who are attached to the monarchy institution itself and therefore respect you as the king;
c) from interest: the other groups of power in your state have an interest in you being the king, and they allow you to have this power momentarily.

(Of course, you could have power over a small group of people through other means too, like physical strength, superior intelligence, seduction, etc.. but these do not hold for a much larger group.)

This leads us to believe that there are also three main ways in which you could lose power, corresponding to these sources of power:
a) if you fail to enforce your laws and punishments, people will stop fearing you, but in order to do this you need money to pay policemen and other law enforcers;
b) if there is a riot or a social movement against the monarchy, or if people start believing you are not worthy of being king, they will not love or respect you anymore and will try to overthrow you. In order to keep the power in this case you need to have money to pay a group to re-establish order and silence the rioters. This group should be large enough to stand up against all the crowd, and its members motivated enough (through money or interest) not to change sides;
c) if the interests of the other groups of power change and they no longer support you or want to overthrow you. The other groups of power can be thought of as the kings of the other smaller states, which, even if smaller, could rally to create a force bigger than yours. If they invade your country, you need to have sufficient money to pay an army large enough to stand against the enemy and well-enough equipped to win. (It is common knowledge that even since the middle ages, armies were made of paid mercenaries, and peasants were not usually called to arms except in the worst of cases.)

So basically there are several factors or changes in environment that could make you lose power, and in every case, the crucial factor that will help you keep your position is to have money.

Power needs money to be sustainable.

But, of course, power can be used to make money, for example by taxing your subjects or expropriating their valuable goods. But the amount that you can gather is limited to the total wealth of your people. Therefore, you are still vulnerable to those external groups who are richer than you.

Now, let's look at money.
Just like we did for power, we will assume you are, in the absolute, rich. You may or may not be the richest person on the planet, but you have access to an immensely huge amount of money. The question that arises is, therefore, whether money needs power to be sustainable. Can we make money and keep money without power? Luckily, the answer is simpler: YES. In order to make new money and keep the value of what you now have, it is sufficient to manufacture and sell a desirable good or product, have market share and make profits. You can even start at the very bottom of the social pyramid and still make huge money (look at Bill Gates or the Larry Page and Sergey Brin - perfectly normal citizens that now count among the richest people worldwide). In fact, in order to make money you require power at company level (ex: voting & management power) but you are not dependent on power at such a big scale as discussed above.

How can you lose money?
There are several major ways in which you can lose money:
a) your business loses clients, becomes unprofitable and runs into bankruptcy: in this case, in order to keep from losing money you need to change strategy, management or redirect your investment in another, more productive area;
b) somebody steals part of your money: but it can't steal all your money because normally you would keep at least part of your money well guarded in a secret account in the Cayman Islands :)
c) the government expropriates your assets and nationalizes your investment : to prevent this all you need to do though, is to diversify your investments geographically.
d) the economy in which you invested your money turns from a free market economy into a centrally planned economy. In this case no one can make any more profits. Here, so that you can stop losing the money, you need power, because it is the only way in which you can prevent this from happening or change back the system.

But the advantage of money is that it's free to move worldwide, and even if you might lose some money because you don't have power, you can still invest the remaining sum elsewhere and gain profits.

Therefore, money can be sustainable even without power.

Plus, money will allow you to gain power. By being able to finance your own political campaigns or to pay / offer benefits to the key groups of power, you can gain the power of president or even that of king (if you have enough money to pay for a "coup d'etat".)

So which would you choose now, money or power? And by the way any insights/additional comments are welcome; I'd love to get your opinion about this, it's one of those endless subjects for discussion that I love so much :)

About

For a very long time I wanted to start blogging, more exactly to resurrect my old blog, which was basically for pieces of fantasy writing. But I feel the need to start from scratch, because this time, it's going to be different. I plan to write more about real life issues, economics, my view on the world, so that I can give whoever takes the time to read this an insight into "andreea-ish" philosophy, and also to document my thoughts and ideas. I often find myself wishing we could have a "brain-recorder", so that we can keep the good ideas without having to write down everything every time. Especially since I often think while walking, so it's not easy to walk and write at the same time! :)

This having been said, let us proceed...