There have been many papers, studies, books and opinions that have made the presses about various market philosophies. Contributors range from F.A. Hayek, L. Von Mises, J.M. Keynes, K. Marx, I. Fisher to M. Friedman just to name a few. In fact, those named here probably represent the core contributors of the various ideas and variations thereof of economic theory and how to manage an economy.
In the main, they all focus on either top down management as referenced by many tomes promoting some socialist ideology, bottom up management with reference to liberal capitalism, or a combination of the two reflecting some middle of the road version of economic theory such as some form of socialist democracy.
One thing common to all these ideologies or theories is that they reflect upon the management of human activity through the lens of supply/demand/allocation/distribution of goods and services, i.e. market activity. Further, they all advocate for a one size fits all approach to economic management which, in my view, is very bizarre. Their tinkering of the economy tends to be limited to adjusting various mechanical levers as if the human experience is some mechanical beast that will do as it is told.
All of these result in an endless debate about the best approach to manage markets and thereby vicariously manage human activity. It’s no wonder that no matter what system you employ, they all appear to lead to disastrous outcomes. They have all missed the point – that of being human beings. It has all been reduced to market activity as if this is all there is to life and in doing so, reduced human beings to simply being producers and consumers. If this is all life is about, I’m happy to get off this train.
This essay endeavours to highlight the problems with looking only through the lens of market activity and perhaps offers a view from the “real” top by looking at human beings with regards to how we fit in to the wider scheme of things and how we are influenced by forces greater than us. Along the way I hope to share some ideas as to why it is that our current economic models fail. All I have to offer are a few insights I have acquired along the way on this subject. I don’t profess to know all the answers and I’m absolutely certain that not everyone will buy into my views – after all, that would be just plain boring. Anyway, let’s go for a ride.
I recall having to plod through P. Samuelson’s tome simply called “Economics”. His text book is widely used in schools and higher education to enlighten the student on economic theories and particularly tries to extend ideas from Keynes. Also, like most, they seem to misrepresent the “invisible hand” from Adam Smith’s Wealth of Nations and I wonder sometimes if any of them have actually read it. There is also a workbook that goes with this for the hapless student to practice.
Back when I was studying, this tome and its adjunct went out of its way to make something simple extremely complicated. I couldn’t put my finger on it back then but the whole thing just smelled fishy. There was an unreality about this that was well out of my grasp at that time. It would be many years before I realised that this book and many others I have had the misfortune to read were better used as doorstops than something gracing my bookshelves.
All these guys start from considering supply and demand which, in itself, does not seem unreasonable. So, I’ll begin there and deal with the first problem. There is a clear and unambiguous distinction to be drawn between what I refer to as “normal” goods and services and “financial” goods and services. I would note here straight of the bat that no such distinction is made by any of the great authors on this subject as far as I can recall. But it is fundamental to understanding why you cannot analyse financial goods and services through the lens of supply and demand. It is a completely different beast that plays by different rules.
I’m going to keep it simple. Normal goods and services do respond to supply/demand analysis in its various forms. When the market gardener sells their produce, a market price is established through the interaction of quantity supplied and amount demanded by consumers particularly if you can haggle for the price. If it has been a bad season, the price may be higher while a bumper crop may see a lower price. You can tweak the supply/demand curves to your heart’s content and consider variations on the theme. However, this is the extent of common knowledge among people who are not economists and, just for the record, I’m neither an economist nor anything else for that matter. Almost everyone can relate to the simplicity of this approach to analysing market behaviour, hence its attraction, and there is no shortage of people discussing and offering opinions about property prices today in this way.
However, financial goods and services do not behave in this way. The best way to explain this is by example. Let’s say someone offers one vintage car for sale and it is a one of a kind. The only thing that affects the price of the car is demand; either there is a high demand or a low demand. The argument that there is a supply of the car is erroneous as it was not newly produced; it already existed in the hands of the seller. The seller, by offering the car is simply indicating that he/she is not interested in holding onto it, i.e. he/she demands less of it. I know this sounds odd but bear with me.
The number of people interested in the car can either bid the price up or down irrespective of the fact that there is only one car. You also do not have to have many potential buyers to bid the price to extraordinary levels. The desire to own the vehicle is the only determinant factor establishing price and this includes the desire to continue to own the car when the price bid is not satisfactory. The more someone wants something, the more that person might be willing to pay and the reverse is also true. This has nothing to do with quantity supplied or quantity demanded; only the desire to own. Any good or service can change from being normal to financial in nature. If a bidder also has access to leverage (debt), they may have the potential to bid the price even higher.
There are many markets where such behaviour is clearly demonstrated, e.g. stock markets, bond markets, commodity markets and so on. Our housing market, something we are all familiar with, is a prime example of the behaviour of financial assets. The desire to own has driven the price of homes to insane levels irrespective of their state. When a total dump costs you a million dollars, you know that there is no mechanical pricing strategy that can explain it. Once this desire wanes or is extinguished, the prices will plummet and it will not matter how many properties are on the market.
This also reflects another feature of financial assets; all boats rise with the tide (of demand) and fall with it when that tide goes out. Even when new supply is added, it floats on the current level of the tide. This is evidenced by the fact that there have been new building developments cropping up all over the place. Nonetheless, the pricing of homes has risen along with the tide. The unreality of pricing is also evidenced by valuations being attributed to an entire class of assets irrespective of the state of those assets. True valuations succumb to market sentiment reflected purely in the desire to own and, in the latter stages of a trend, the fear of missing out.
Traditional economists and bankers, including our Reserve Bank, rely of mechanical tools such as interest rates to affect the markets. However, they are human beings just like the rest of us and yes I know, many of you are likely to be objecting about this point but they are. They are part of the same market that everyone else is and therefore subject to the same sentiments that the rest of are. When the market moves a certain distance in either direction, we all registered it. As prices increase, we become more confident about our valuations. As prices decrease, we become less confident with our valuations. A movement in interest rates is an acknowledgement that the risk associated with the valuation of an asset has changed. Interest rates do not move markets. Markets move interest rates. It is something that happens after the fact – after we all become aware that our sentiment has either cooled or heated up.
Traditional economists have confused a recording device for a mechanical lever which is a fundamental flaw in their current models. This is a consequence of looking at human beings through the lens of market activity. Markets do not move humans; humans move markets. Economists and bankers do not have a crystal ball to forecast markets and their tools are generally limited to drawing straight lines. Human beings are anything but linear.
The failure of traditional economics to distinguish between normal and financial assets often leads to so called regulators claiming they could not have foreseen disaster when it happens. The total disregard to human zealousness is common but also commonplace. As was reported in The Guardian some 12 years ago (no date specified) with regards the 2008 credit crunch:
The former Federal Reserve chairman, Alan Greenspan, has conceded that the global financial crisis has exposed a "mistake" in the free market ideology which guided his 18-year stewardship of US monetary policy. The Guardian
Need I say more. There is no reality to valuations when it comes to financial assets, particularly as the trend relating to such an asset or asset class matures. Either someone desires what’s on offer or they don’t. Either they are willing to pay a price or they are not. There is no “agreeing” to a price according to efficient market hypothesis. There is only the taking of a price or not as the case may be.
Financial asset markets are not “efficient” based on supply/demand analyses or on the basis of price agreement. They are efficient based on buyer sentiment reflecting their level of desire to own property. In a free market, the fever of desire generally will run its course and we all watch in disbelief knowing full well how it all ends and yet participate in the folly nonetheless as if we have no choice – BUT we do have a choice.
Unfortunately, determining how much something is desired or not is beyond the scope of any mathematical tool available to traditionally trained economists; these are also economists who happen to be the principal advisers to government. As such, it is not surprising that they simply do not go there and we are the poorer for it.
Here lies another issue in misunderstanding an economy. Most economists will only consider the economy from the perspective of business cycles. This is entirely expected as their analyses tend to focus on market activity. Here is an example from a Khan Academy lesson on how business cycles operate: Khan Academy
|Phase of cycle||Description|
|Expansion||When real GDP is increasing and unemployment is decreasing|
|Peak||The turning point in the business cycle at which output stops increasing and starts decreasing|
|Recession||When output is decreasing and unemployment is increasing|
|Trough||The turning point at which a recession ends and output starts increasing again|
Sounds reasonable and business cycles do exist. However, they do not exist in isolation as they are a small subset of much larger cycles. Market activity dominates the world view of economists and regulators and so, unsurprisingly, it also partly explains why businesses have so much clout with governments often at the expense of ordinary people. It is an extremely limited view of an economy. Businesses are important but they are there to serve people; not drive them crazy.
Any discussion concerning an economy should begin with a discussion of the human factor. However, most discussion tries to consider the human element through the lens of market activity which leads to a myopic view. This approach is akin to starting the race half way up the track and only focusing on the track itself. It invariably puts business activity, and the management thereof, at the top of the tree. It’s no wonder we end up being driven by business needs at the expense of human needs. I’m not saying I understand it all but, nonetheless, let’s have a go at putting people first and see where it leads.
First, from my perspective, let’s consider how we, as human beings, behave. It is a good place to start as it helps us explore what we want out of life. It is clear that we are affected by cycles. The business cycle demonstrates this but let’s consider this from a broader perspective.
We are all familiar with cycles; from the seasons of the year, the monthly cycles responsible for your very existence on this planet, to the psychological dramas going round and round in your head. We are all familiar with working with the cyclical nature of things (going with the flow so to speak), to becoming entrenched in pathological behaviour. Cycles exist at all scales; from the personal level to the grand cosmic display. There is no denying the existence of cycles given we are so heavily reliant and enmeshed with them. They are part of our life on this world.
Cycles, by their very nature do not move in straight lines. Nothing goes up in a straight line nor does it come down in a straight line. Everything ebbs and flows on its way up as well as on its way down. We see this best in tidal activity as tides come in and go out. There is also a period of pushing and pulling at turnaround points before the new trend takes over. Human beings and human activity by extension is not immune to these cyclical behaviours even though there are many who would deny this.
We can narrow this focus to consider two aspects that are cyclical but tend to dominate our lives; periods of optimism as the tide comes in and periods of pessimism as the tide goes out. How we behave when we are optimistic is quite different from how we behave when we are pessimistic. More importantly, what we want or desire is directly affected by our state of being and our perceptions at that moment.
As I said, optimism and pessimism are cyclical. It causes us to view the same thing under a different lens. Even though the thing itself never changes, it causes us to alter our perception of it, which in turn, makes us behave accordingly and we are very good at finding excuses to fit our actions. It is contagious and at extremes of optimism or pessimism, we are prone to behave in the worst possible ways.
When we are optimistic, we express ourselves with greater levels of confidence. We are more willing to take risks and step out into unknown territory. Our confidence can allow us to go it alone. When we are pessimistic, we tend to feel more vulnerable. We desire greater levels of security and we can easily be triggered by things that we may consider threatening as opposed to challenging. We may find greater comfort in things close to home and in familiar groups. When you see someone succeeding, it generally gives you more confidence that you too might succeed and the reverse is also true. It takes a critical mass (not necessarily a majority) to propel us collectively in one direction or the other.
Each and every one of us knows this to be true (whether we admit it or not) as we have all experienced these states at one time or another. We also know that this affects us collectively; just consider crowd behaviour or our choice of government, particularly when we decide to kick the bums out.
Further, any stock index demonstrates the cyclic nature of these states having regard to advances and periods of declines (recessions). Such charts, for those looking, also demonstrate the depth of public sentiment having regard to the speed and extent of those advances and declines. From my earlier discussion concerning the nature of financial assets, you will recall that the pricing of such assets is driven by the level of desire to own which in turn is driven by sentiment. As such, these charts are a window into the direction and levels of sentiment of mainstream society.
From my perspective, this gives rise to there being two economies in any nation state; one when we are more optimistic and one when we are more pessimistic. Management requires somewhat different approaches in order to meet people’s needs. However, in any democratic system, we are also very good at regulating our governance needs to reflect our dominant state or sentiment.
We are good at changing the guard as our sentiment changes or re-electing those in office when our optimism persists. We are very good at conveying our dominant collective sentiment by way of elections and civil action especially when we want change. When we are uncertain, we somehow manage to reflect that as well with stalemate elections that slow the legislative process down to a crawl.
Many believe that those in power are the ones calling all the shots. However, in my experience the true puppet master is the public and those we call “masters” reflect the face we love to love or hate. Those in positions of power are also subject to the same emotions as the rest of us so it is not surprising when we, as a collective, elect officials who mirror our sentiment. Also, their behaviour is more likely to be consistent with whatever is going on in mainstream. If people are buying houses, they are probably doing the same so are unlikely to interfere no matter how loud the noise becomes. As such, they are only following crowd sentiment. When these sentiments reach extremes, we can be at our worst.
Politicians generally have a good built-in antenna for receiving public sentiment. Winnie has an excellent nose for detecting dissent among the ranks from a thousand paces. But they are also human beings and not always good at handling rejection when public sentiment shifts and tantrums can be exciting to watch.
From my point of view, democratic systems appear to self-regulate to reflect our needs because those in governance are no different to mainstream. Also, anyone trying to stem the flow of extremes is only likely to find considerable opposition. When we are happy, there is a general loosening of regulations. When we feel vulnerable, we see regulations being tightened and security enhanced. Look for censorship rhetoric to increase the more vulnerable we feel. When we are uncertain, expect little or nothing to happen but there will always be plenty of talk. The degree to which these things happen depends on where we are in terms of the larger trend. More importantly, no matter what, we put people in positions of power so that we always have someone to vent at and blame for whatever goes wrong – this is part of the job description whether they like it or not.
There will many who will resist the notion that they are not really in control. It completely goes against the grain to even suggest such a thing. It is totally unacceptable to think that we do it all to ourselves. It is far easier to toss the blame elsewhere and expect someone else to fix it all. But I’m only telling you what I see and you can do with it as you please.
Nonetheless, democracy does not appear to the problem in my view. If that is the case, where have we all gone wrong; perhaps some other tinkering was involved? So stick with me as we explore some others things that have been misunderstood. I’ll take you for a ride to a place where you and I are likely end up in total agreement even if we don’t agree up to this point.
Let’s start with an extract from the Harvard Law School Forum on Corporate Governance:
Corporations today operate according to a model of corporate governance known as “shareholder primacy.” This theory claims that the purpose of a corporation is to generate returns for shareholders, and that decision-making should be focused on a singular goal: maximizing shareholder value. This single-minded focus—which often comes at the expense of investments in workers, innovation, and long-term growth—has contributed to today’s high-profit, low wage economy. Many business leaders, policymakers, and average Americans accept this doctrine of corporate governance as “natural” law—the unshakeable reality of business. However, shareholder-focused corporations are not natural market creations,… Harvard Law School
Here, in New Zealand, companies are separate entities with separate legal personality. They are afforded rights and privileges of a person and limited liability companies limit shareholder liabilities to the amount of their investment in the company. It gives companies the right to be able to transact as an independent separate person from its shareholders. Most things relating to companies are consistent across most jurisdictions.
Companies are a useful vehicle for pooling resources and engaging in trade in a broader sense. They can reach further than any one individual and also provides continuity whereas, and I hate to break it to you, but each and every one of us is destined for the grave sooner or later (at least on this world). Most companies tend to follow the “shareholder primacy” referred to in the above quote and much of the discussion on public accountability refers to corporate obligations to members of the public or community. This is often discussed in the context of “stakeholder” responsibility of companies, i.e. whether the public or community is a stakeholder of the business.
From my point of view, this is completely the wrong conversation for the simple reason that it puts businesses ahead of human beings.
Human beings organise their activities through cooperation. It is only through cooperation that people are able to exercise individual freedoms. A busy sidewalk often has foot traffic in both directions. In the main, people manage to walk without running into each other – even when they are all busy staring into their mobiles which amazes and amuses me to no end. There is an unspoken recognition of personal space and yet this understanding still affords the freedom to walk.
Understanding the larger framework within which freedoms are exercised is important. Also, human beings create tools to pursue their endeavours. Companies are just vehicles we use to achieve some desired result but problems arise when we let our tools dominate our lives.
Conducting any form of business in a community assumes that the activity benefits that community. As such, business is conducted in the context of a community. The community is not a stakeholder of the business. The business is the stakeholder of the community within which it operates. The alternative sets up the community for potential extortion.
However, because the reverse is the normalised view, many steps have been taken over the years that have systematically created a large distance between business owners, their vehicle of choice and communities within which they conduct their operations. Creating such distance enables corporate enterprises to dehumanise their operations, which in turn can lead to a lack of responsibility and accountability. It allows them to serve a small group at the expense of wider communities.
I should point out that not all corporate enterprises behave without regard to communities and small to medium sized enterprises do tend to be sensitive to local needs. However, large enterprises and, in particular, multinational corporations can and do create dramatically lopsided relationships with significant long term consequences.
Further, such an enterprise’s ability to leverage large resources has the potential to skew power away from people in favour of directors, shareholders and other investors. Once this privilege achieves a critical mass, and I note that it does not require a majority, it begins to undermine individual democratic rights and, in extreme cases, even ignore the rule of law which is fundamental to the operation of any democratic system. The effect of the lobby of large corporations is well known in many jurisdictions. This is irrespective of the fact that corporations are not voters.
I recall listening to a talk by Theodore Dalrymple, author of the book “The Knife Went In” where he recounts stories of murderers in prison. He notes how such people refer to the knife going in as a way of distancing themselves from their actions. In other words, the knife killed the person. Distancing is a sure fire way of disconnecting yourself from your actions and, more importantly, from your very humanity.
In the case of some corporations, this distancing has allowed its operators to become desensitised. This, in turn, has resulted in some of the worst behaviours, including exploitation of people and resources, around the globe and I challenge anyone to disagree with me on this point. Corporations are vehicles but our vetting of its owners and drivers has been poor. We have allowed corporations to drive as they please especially when they carry vast amounts of resources and represent wealthy interests. There is nothing wrong with being wealthy. What is wrong is when such wealth skews democratic power both locally, nationally and globally. What is wrong is when people’s voice comes a distant second to the lobby of a corporation. What is wrong is when wealth commands a voice that clearly states that it knows what is best for everyone else.
As I said, the current conversation of stakeholder rights places the corporation ahead of the community within which they operate. This creates a distance that influences their behaviour. In the case of multinationals, that distance is vast and its behaviours tend to reflect this. This idea needs to be reversed to recognise that the corporation is the stakeholder of the community. Only then will the conversation flow in the direction of the communities within which they operate.
Back when I was working in an organisation in the early 1990s, I recall picking up a book on Jack Welsh. He had been a head honcho at General Electric (GE); an engineering company producing quite innovative solutions such as the Magnetic Resonance Imaging device (MRI) we are all familiar with in hospitals today. I recall the board members comprising various engineers and sales people – people who actually did stuff.
However, change is a constant and changes to the board were no exception. What is notable however is that the makeup of the board shifted from people who actually produced and sold stuff to people who were money managers. In other words, the bankers had taken over the company. I recall someone mentioning that it was easier and more profitable to play the markets than produce and sell product. I remember thinking at the time that this was not a good sign of things to come.
Soon after, I began to notice many other companies follow this example although it may be that GE may not even have been the first, although it was the first I had taken notice of. This reflected a transition from a production economy to a substantial investment economy. This is not only relevant for the United States but also here in New Zealand and other jurisdictions to varying degrees. As this freight train rolled on we saw the dissolution of local manufacturing in favour of financial enterprise. We were well on the way to the edge of a cliff with a very long drop ahead. If you were ever wondering how consumerism became the norm in many jurisdictions, you may now have your answer.
Ordinary small to medium sized enterprises, particularly locally owned and operated, allow effective circulation of wealth (also referred to as the velocity of money although I use this term in a broader sense). In other words, a dollar spent locally may circulate many times in that community before it is taken out. Large local enterprises allow for greater volumes of wealth to circulate. This is an effective hedge against recession and, in a low debt system, it tends to also be a hedge against inflation. It doesn’t mean that we avoid recessions but it does help us to mitigate some of its effects. It’s a system that allows us to save when things are going well and spend when things get tight.
The circulation of wealth is essential to lubricating a community and allowing people to transact with each other. As locally based production ceased, people turned to imports to meet their needs. Nothing was being produced and money was flowing out of the communities. This is when the bankers stepped in to provide the lubrication in the form of debt. This allowed consumer spending to continue and inflation became the big talking point. It’s not unusual to see people taking holidays and chalking up the price on their credit cards. People talk about societies as being consumer societies. This is not really accurate. It is a natural consequence of debt being the lubrication in the system instead of personal wealth. It is a consequence of a society that has shifted its focus to financial investments at the expense of production.
Further, debt lubrication means that our capacity to save during good times is compromised and we end up paying the price on the other side. Debt driven systems encourage us to spend up large to keep things moving. Now we have debt ridden economies where the debtors, being members of the public, are also the guarantors of the loans – go figure. Personally, I have no sympathies for the lenders in this case although I doubt that they are concerned.
The loss of circulating wealth also results from companies extracting capital from a community for shareholders and investors located elsewhere or even through the hoarding of that wealth by a few. Capital leaving a community is not a problem when there is trade with outsiders allowing for capital inflows. However, once again, communities suffer as a result of this loss and matters are made worse when debt funding becomes a normalised way of replenishing this circulating wealth.
There is nothing wrong with debt funding itself. It allows us to extend ourselves beyond our means for a period of time (preferably a short period of time). It is however a huge problem when debt becomes the normal way of funding circulating wealth as most of that goes on consumer spending. Further, continuous siphoning of circulating wealth that is replenished with debt results in a ballooning of debt that can never be paid back.
Market crashes are generally initiated through the defaults of consumers. When a business defaults on a loan, it generally doesn’t have a cascading effect to take down the whole market. This is because businesses are still trading and so can weather the losses associated with a default. Also, businesses are connected to many consumers which enables their trade to continue.
On the other hand, consumers are connected to many businesses. Large scale defaults on their part can easily create a cascade of insolvencies. Public discussion often focuses on public debt relative to gross domestic product (GDP). However, the real weak link is household debt to disposable income and the gap here has grown very wide as is seen on the chart below.
This chart sourced from our Reserve Bank’s website shows that prior to 2009 household debt and our ability to service that debt rose together. However, since then, our ability to service debt has steadily declined as evidenced by the downward sloping red line while debt has steadily increased. This divergence has grown large as our love affair with debt has blossomed. The talking heads will have you believe that we can keep spending on debt forever but this chart suggests otherwise.
So here we are today where people talk about billions and trillions of dollars – the mind boggles. It won’t be any surprise to me when all this simply disappears – after all, it was created out of nothing in the first place. Many consider that we have indebted future generations. However, even though deflation is not a pretty thing nor is it painless, it will nonetheless level this playing field.
So, in a nutshell, this is not a flaw of capitalism per se. The problem arises from a loss of local production in favour of imports funded by debt. It also arises from the siphoning of circulating wealth from communities which is then replenished with debt. This effectively removes the hedge a community has from recession and inflation. So here we are and what can we do?
Communities need to change the conversation to focus on building and retaining wealth for their people. They need to focus on rebuilding the hedge against recession and inflation. They need to stem the outflow of wealth particularly by large enterprises with distant investors. This does not necessarily mean doing away with them as they leverage vast resources and this is a valuable attribute. These enterprises need to favour the communities they are engaged in and that means changing the terms of the relationship. That requires shifts in perspective on the parts of those enterprises and community members. The distance that currently exists between large corporations and communities needs to be narrowed. Continuing to extend ourselves by borrowing more and more is not a solution.
Enterprises big and small need to recognise that they are stakeholders of a community and not the other way around. They are there to benefit the communities they operate in. This in turn will benefit them as they are part of those communities as well.
People need to realise they have more power than they think. Making changes locally means, in the long run, changes in government policy. No government will solve your problems for you. Whatever they do will only reflect mainstream – so becoming the mainstream is the only solution. The reference below is perhaps an example of changing the conversation that may be of interest to you. It refers to a community in the UK that decided that enough was enough. CLES is the national organisation for local economies - developing progressive economics for people, planet and place.
People often say that money is the root of all evil. In my view this is not the case. We create tools to help us navigate our lives whether they are knives, forks, chisels, power tools or companies and money. It is a poor workman or woman who blames their tools for their woes. Just as the knife is not responsible for the murder, neither is money responsible for the financial problems we face today.
I referred to companies transitioning from being producers to investors. This is a consequence of requiring companies to focus primarily on creating shareholder or investor wealth. Directors will always pursue a more direct path to reach their goal. Contrary to popular belief, they are human just like the rest of us. How often have you cut across a field instead of following the paved path on your way to somewhere? It is natural for us to look for shortcuts and company directors are not immune to this irrespective of the fact that we might want to hold them to a higher standard.
There have always been people who speculate their way through life and some are more successful than others. However, when corporates are leveraged to pursue speculative activities, they tend to bring large sums to the table which has the effect of hiding the true value of underlying assets they invest in such as shares in other companies. Speculative values are driven by emotions that ebb and flow both positively and negatively. Everyone is happy when they are making money but only the money managers are happy when portfolios trend negatively.
Debt ridden communities then turn to these speculators to get them out of trouble without necessarily realising that such entities are not there to benefit them. They have been structured to primarily benefit their investors. Even if they do realise this, their circumstances may be such that they consider the gamble to be worthwhile – until they lose it all of course.
Finally, individuals join the party seeing the opportunity to get rich. Playing the markets is not easy and the learning curve can be painful for many. Their lack of experience makes them easy prey for seasoned players. It gets even worse when they bring borrowed money to the table. Every bubble, without exception, has always burst with dramatic consequences for all.
There is no such thing as easy money. However, the pursuit of money for nothing has real consequences for communities and nations. The loss of real productivity and the loss of wealth undermine us all.
A banking system in a community is a store of wealth for the community. It also offers lending opportunities that allow people to extend themselves for a time. However, most banks (if not all) are owned by a handful (hidden behind various shell entities) whose interests do not align with the interests of the communities within which they operate. Matters are made worse as they predominantly operate in cyberspace today and so are extremely disconnected from people who actually rely on them. This makes it really easy to direct people’s wealth (what’s left of it anyway) towards speculative endeavours and for them to disappear leaving people out of pocket.
Gone are the days when banks were a store of community wealth. Today our banking systems around the world are in the worst shape ever as they have lent far, far, far in excess of depositors funds. It goes to show just how far removed such entities are from people and the vast distance between what is the real value of productivity and the imaginary values we have attributed to it.
We, as ordinary citizens, will end up paying the price. However, I am always hopeful that we might come out of it somewhat wiser and do better. After all, cycles provide learning opportunities. If you don’t learn, you’ll get to repeat it. If you do learn, you get to get on top of it and move on to new challenges. With that said, let’s have a look at how things could be different.
Like I said at the start, I don’t have all the answers. I only have a few insights to share and for all I know, I may just be talking through a hole in my head. In any case, now that I’ve got this far in writing this, I figure (perhaps naively) there’s no downside to continuing. So I offer my thoughts on some possibilities if our objective is to get on top of the cycles of optimism and pessimism as they appear to be the main drivers of our behaviour in economies.
The first is to recognise that we are subject to cycles that are, at this time, greater than ourselves. We need to recognise that our economies are anything but mechanical instruments that can be adjusted with various mathematical levers. The fact that this has NEVER worked is a very BIG clue.
Even Irving Fisher, the famous/infamous economist who created many mathematical tools recognised this after the 1929 crash. He had to lose everything before he saw the light so to speak. Surely we should learn something from this also. However, I’m also aware that my views here are unlikely to be taken seriously by many until the tide has shifted in earnest. I’m very accustomed to watching these cycles play out and I learnt long ago not to push shit uphill.
We need to experience and get good at riding the waves instead of being constantly at its mercy. Getting on top of these cycles should be our goal because there lays greater freedom and greater opportunities.
Second, we need to change the conversation about a company’s obligations to the community within which it operates. I have said enough about this in my rantings above and we do have a real live example of a community that appears to have taken control of this conversation.
Such companies need to offer wealth building opportunities and not just wealth extraction. The interest of human beings needs to be placed ahead of the tools that we create which includes companies. Businesses are stakeholders of communities and this relationship needs to be recognised at national policy levels. However, there is nothing to prevent local communities from starting that conversation.
We need to get out of the habit of blaming our tools for our woes. Handling these tools, particularly the power tools, requires skill but mostly importantly, they need to work for our benefit. Letting our tools dominate our lives leads to suffering. We need to treat all conceptual tools like power tools that all have a “handle with care” label clearly attached.
Third, locally owned banks are very important for the store of wealth and the provision of liquidity for local communities. In New Zealand, we had regional charitable trusts that also operated trustee banks. Back in the mid 1990’s these were sold off, with the exception of a couple, to Westpac – a foreign owned enterprise for a very nice price. However, this also was the start of wealth extraction out of New Zealand and today we are predominantly holding IOUs. The rest, as they say, is history.
In my view, local banking that is about storing local wealth and providing liquidity is an important part of strengthening a community. I’m not saying that foreign investment and ownership should be avoided. But that dog better be held on a tight leash because the owners are distant and their interests will not always necessarily align with local interests. More importantly, they have to be involved in wealth creation that exceeds wealth extraction.
Bottom line, a healthy community operates from a position of wealth; not debt. Further, as we all know, debt will bury you if you lose control of it (which we have). A debt based culture is a culture of servitude and as anyone who has ever been on the other side loaded up with debt can attest to, debt magnifies our worries and insecurities. Finally, never trust a politician who says they’ve got it all under control.
For all those not convinced, ask yourself this simple question - would you rather accept a million on a winning lotto ticket or borrow a million from a bank?
Thanks for stopping by and I hope you enjoyed the story.
Don't forget to check out my other writings on my website and my books are available from the Amazon bookstore here.
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