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Eureka: A fireside chat on contemporary economics
by Jay Gutman
2018-04-23 08:22:00
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If you're sitting at a café a discussing the economy with friends you might mention the recession, argue that there should be a gold standard, discuss the debt crisis or try to come up with solutions for growth. There are several sides of the coin to the global economy, some of which I will discuss in this fireside chat.

So let's look at things this way. You want to make money. What do you do? You can provide services, but the service has to be in demand. You can produce and sell, but the production has to be in demand, and there needs to be no accidents in your production chain. You can borrow money to start a production chain, but the again you need perfect conditions to be able to sell your products. Or you can live off passive income, but then again you need income to make passive income. Plus; the economy evolves in time, and you efforts have to be constant to keep that income up. In this fireside chat I will discuss the global economy and several big questions related to the economy. 

Why make America great again?

America used to be an industrial powerhouse. No country compared to America when it came to industrial production. Be it food, clothes, cars, housing, transportation, steel, energy, you name it, America had it all. To be an industrial powerhouse you need raw materials, you need technology, you need human resources and you need good logistics, transportation and marketing channels. America had it all.

econom01_400But then many countries were encouraging Americans to move their production in exchange for cheap labor, cheaper real estate, lower taxes, and an ability to transfer technology. American brands could be found around the world, only to find themselves competing with other brands. As Thomas Friedman says the World became flat, and anyone could start competing against the United States. But other countries had home court advantage. They had cheaper real estate, cheaper labor, symbolic if non-existant taxes, in some cases unlimited access to loans, friendly relations with their politicians who legislated in their favor and to oust competitors, non-existant patent laws which made their product of equivalent quality to American products but a lot cheaper.

Let me sum up what some other countries have that makes them better competitors than the United States, and how to solve that.

-Cheap and disciplined labor. A lot of countries have cheap labor which is highly disciplined and motivated. A lot of times that labor force accepts cheap wages because their priority is to make their country great, and their personal needs are only secondary.

-Cheap real-estate. When setting up factories in those countries, real-estate comes at a symbolic price. That means they save a lot on real estate. Not to mention that property taxes don't exist in a lot of countries.

-Friendly, family relations with politicians, bureaucrats and bankers. In a lot of countries, businessmen can pretty much tell bankers, politicians and bureaucrats what they should do. And they are not always polite when asking favors. They can destroy competitors with new laws, get unlimited access to loans that they pay back whenever they feel like it.

-Friendly relations with the press. In a lot of countries, the press has friendly relations with business. That is business is portrayed in a positive light, the negative aspects of business are often hidden from the press, and scandals are only revealed when they involve competitors.

-Non-existant, non-applicable patent and copyright laws. You don't have to buy patents to start production.

Unfortunately, America does not have cheap labor, does not have cheap real-estate, does not have friendly relations with politicians, does not have friendly relations with the press, and when you need technology, you have to pay for it. All this has put Americans at a disadvantage, with a lot of Americans trying their luck in foreign countries where the business climate is not as “repressive as in the United States.”

But the American business model survived specifically because it is well regulated. Let's see what happens as different countries had different business models.

-Cheap labor force: workers are now demanding higher wages because they realized that those politicians and business owners who promised them a bright national future in exchange for their cheap labor did not fulfill their promise. They kept the profits to themselves, and acted in highly contemptuous ways toward their cheap labor force.

-Cheap real-estate: real-estate prices have gone up in areas in high demand, but real-estate speculators lost fortunes by investing in ghost towns where no one wants to live.

-Friendly relations with politicians, banks and the press: this has led to billions of dollars disappearing, to many politicians, bankers and members of the press killed or in prison. A lot of countries are talking aboutr reviewing this model.

-Non-existant copyright and patent laws: Some countries had the balls of selling copyright infringed products in Europe and the United States, got caught, and had to pay hefty fines.

So in the end the American model isn't that bad. America went through some sort of recession followed by questions on the American model of growth, but in the end, America's competitors are struggling specifically because their business models were not durable.

Quality or quantity?

Ideally any economy would have high quality of products in huge quantities. The trend over recent years is that the quality of products has been going up, and that businesses have not always been able to keep up with the quality trends. Furthermore many businesses have offered quality products in huge quantities, but given the price for such products demand has been low.

When discussing the global economy, few have discussed the quality factor and rising costs of production. The availability of technology means the ability to produce higher quality products in larger numbers, but also means that prices for such products have gone up.

Another factor is the indispensability factor of an increasing number of products. Phones used to be optional, and so were computers and a lot of other high-tech products which are now indispensable. This means more expenditures for households and businesses, and lower profit margins.

So if you look at the balance sheet of a business thirty years ago, twenty years ago, ten years ago and today you would see rising costs which I will describe as follows.

Thirty years ago: real-estate costs were low, labor costs were low, energy costs were low, marketing costs were low, technology costs were low, taxes were low, transportation and logistics costs were high.

Twenty years ago: real-estate costs were low, labor costs were rising, energy costs were low, marketing costs were rising, technology costs were rising, taxes were rising, treansportation and logistics costs were declining.

Ten years ago: real-estate costs were rising, labor costs were high, energy costs were high, marketing costs were high, technology costs were high, taxes were high, transportation and logistics costs were low.

Today: real-estate costs are high, labor costs are high, energy costs are high but declining, marketing costs are low, technology costs are high because they add up, taxes are high, transportation and logistics costs are low.

So when thirty years ago the main expenses for businesses were transportation and logistics, today a mixture of high real-estate costs, high labor costs, high energy costs and high technology costs means that a lot of businesses have lower profit margins than they otherwise would have had thirty years ago. When you add the quantity of production factor into the mix, you get even lower profit margins.

Another factor is that today a lot of retailers are not independent retailers but belong to a retail chain which imposes them all kinds of products that they otherwise would not put on the shelves because they don't sell very well. When retailers don't have control over what they sell, this means you can have quantity in the short-run, but in the long run your retail model can go bust.

Europe: when the giant falls asleep

Europe was once and industrial powerhouse. It still is to a certain extent, but here are some of the factors that have caused stagnation in Europe:

-High taxes to support a welfare state. This gave an incentive for a lot of European industrial giants to move to other parts of the world where taxes are lower. So Europe went from industrial giant to retail giant.

-High real-estate prices. Europe is notorious for centering its industry around big cities and capital cities. The only country that spread its industry around the country was Germany. Other countries, for cultural reasons, don't want to be too far away from Barcelona, Paris or Athens, because you'd look like a bum if you set up your factory elsewhere because people from smaller cities are considered “primitive.”

-High labor costs and aggressive unions. God forbid you omit a penny from a European's paycheck. You'll have the unions barking at you. High labor costs and labor standards which make layoffs almost impossible, and all the perks and benefits that workers get. This means that unless industrial production is absolutely necessary in Europe, it usually goes elsewhere.

-CEOs making 100 times the average worker's wages. In the old days CEOs made at most 10 times the average worker's wages. But when they make 100 times the average worker's wages, they have the unions going after them even more ferociously.

-Class startification and caste systems. I'm not exaggerating. In Europe, if you're from Oxford of Cambridge of HEC you get one kind of treatment, if you're not you get a different kind of treatment. This means a lot of people don't feel they have a fair chance at success, so they go elsewhere to get their shot at success.

-Overlesiglation. You have so many laws in Europe that by the time you end up knowing your rights and obligations, you have no more energy to start production.

So all these factors and others I haven't listed means that Europe has gone from industrial giant to retail giant. But this means that Europe depends on the industry of foreign countries, and it's never good to depend on other countries for your industry.

East Asia: the Allen Iverson, Scottie Pippen or Antoine Walker of the economy?

60% NBA players end up filing for bankrupcy within 10 years of retiring from the NBA. A lot of times, they cite gambling, and excessive lifestyle and bad investment deals as the reason for filing for bankrupcy.

I watch a great deal of Chinese, Japanese and Korean television, and find that East Asian tycoons have a lot in common with NBA players. A lot of them gamble, a lot of them engage in excessive and reckless spending and have highly refined tastes for luxury, and a lot of the investment deals are bad, or to put it bluntly, very bad.

The 1997 Asian financial crisis had laid the finger on these excesses, but East Asian countries' high public and private debt levels have shown that another crisis may be looming in the not to far distant future.

East Asia is an industrial and technological powerhouse, but here are the reasons why I don't see East Asia leading the world economy in the distant future.

-Reckless spending. A lot of East Asians don't have pulse control when it comes to budgeting, don't ask for second opinions on big purchases, and some of their spending habits would make Americans look like geniuses when it comes to budgeting.

-Unlimited access to debt. East Asian companies can borrow as much as they please, and can always hang themselves if the debt spins out of control. There are no debt control policies in East Asia.

-CEOs making 100 times more than the average worker, and has full totalitarian control on the company. This means there are no checks and balances in East Asian big business, which means that when bad decisions are made, you have to stick to the bad decisions.

-A rigid caste system, which is not even merit-based. In Europe at least you have a shot at becoming a leader if you go to the right schools. In East Asia, the caste system is hereditary, meaning that most people in leadership positions often don't have the skills to be in leadership positions.

-Anti-intellectualism. Most East Asians don't have time to be lectured on how science or the economy works, meaning more uninformed decisions are being made.

-Family-like relations between business, the media, politicians, bureacrats and bankers. A lot of times politicians hail from big business, big business owns a lot of the big media outlets, and in some cases big business also owns banks. In the absence of checks and balances, this means more reckless decisions can be made.

For all these reasons, I don't see East Asia becoming the economic giant of the 21st century. There are other reasons, such as low birth rates, highly centralized governments and lack of business accountability among many others.

What the African economy needs

Right now the African economy is mostly a group of countries with monocultural economies, meaning that they export one product for hard currency, rely on foreign aid, and the olligarchs divide the money amongst themselves. This leads to very intriguing stories and fascination about the olligarchs, serious consequences for anyone who threatens the olligarchs, and a caste system that is not mert-based but mostly hereditary.

The African economy kind of operates like my ex-fiancée. My ex-fiancée wanted a big apartment at all costs, fully equipped, and other big expenditures when neither of us had a job. I tried to explain to her that we both needed to work three jobs, start off with a small apartment, and buy a bigger one as our income keeps pouring in.

African economies wanted to industrialize before they had the income to do so. What they should really do is intensive agriculture, use the income to build tourism, technology and industrial bases, and then try to avoid falling for the pitfalls that a lot of the industrialized economies have fallen for. But a lot of times African economies borrow money just so they can have an industry, but often don't have the economic software to keep the industry running, that is roads that are maintained, engineers, a market economy and everything that goes with industrialization.

Latin America, the next East Asia?

Latin America is slowly industrializing and has almost amassed enough capital to become an industrial powerhouse. Plus they have all the cheap labor and cheap real-estate that goes with heavy industrialization. What they lack is the technology and educated workforce that goes with industrial development, but both are slowly materializing. But then a lot of the problems are similar to those found in East Asia, as in unlimited loans, luxurious lifestyles and tight-knit relations between banks, politicians, the media and big business. Some wonder why Latin America is failing to fully develop, and the main reason is it has failed to master technology to produce high quality products, and that the security situation is preventing a lot of businesses from thriving.

The problem with MBAs and with Harvard Business School and other schools

I hear a lot of people say that if you're smart enough to start a business, you don't need a business degree or an MBA. But that's not the main problem with business schools.

The main problem with business schools if, if they teach you anything, they teach you to handle liquor, to gamble, to spend extravagantly and to engage in highly risky business investment ventures. The cost of business school itself is high, expensive, almost a luxury. A lot of the case study are those highly risky business ventures that succeeded. The lectures are speculative at best, and the networking it involves hides the fact that a lot of companies are being managed in totalitarian ways. Business school graduates want to be lynchpins, and end up in management systems that treat everyone like cogs.

Unemployment and the rise of totalitarian management

Underemployment rates have reached 25% in some parts of the world, youth unemployment rates have reached 50% in other parts of the world. And when you do get a job, management styles are increasingly totalitarian, that is workers are at the helm and mercy of bosses and can not decide anything for themselves. In this part, let me discuss why such high unemployment rates, and why the rise of totalitarian management.

The reasons for high unemployment rates:

-The high cost of education and training means that employees want to get paid a decent amount of wages to break even when it comes to paying back their students loans or training fees.

-The increasingly generalist nature of workers. In the past, workers were highly specialized, and you had to hire freelancers, other companies or outsource tasks. Now most employees can do most tasks.

-Free technology. In the past, you had to hire graphic designers or firms specializing in graphic design. Same goes for advertising agencies or public relations. Now pretty much anyone can do such tasks.

-The increasingly easy tasks for white collar workers. In the past, white collar workers were the intellectual class, highly specialized. Now pretty much anyone can use the kind of technology required to be a white collar worker.

-High competition rates for white collar jobs because of the generalist twist those jobs had taken. In the past white collar jobs used to be highly specialized, now they are generalist jobs and everyone can apply.

-Knowledge is free. In the past, you had to pay people to get knowledge and information. Now you can pretty much google that.

-The highly competitive nature of service sector jobs. In the past, you were lucky if your town had one or two pizza places. Now I bet your street has at least 5 pizza places, regardless of what part of the world you happen to be in.

-The increasing reliance on part-time workers to do full-time jobs. In the past, professionals were hired for full-time jobs. Now, an increasing number of part-time workers are doing jobs that are technically full-time jobs;

-Pornography, gambling, drug-addiction, bullying, hazing, harassment, sexual harassment: unemployment is as much about having a job as it is about retaining it. Not that harassment did not exist in the past, but it has taken epidemic proportions, prompting many to leave their jobs.

-Industrial and retail giants: in the past you had the option between working for smaller industries or retailers or larger ones. Now, your choices of employers are being narrowed down.

-Complex skill sets. In the past barbers pretty much had it easy and involved quick haircuts. Now even barbers need complex skillsets. Same goes for office workers, teachers, nurses, doctors or even farmers. For any job, you need a complex skillset that if you don't have, you can stay home.

Now here are signs of totalitarian management, a mode of management that is increasingly being adopted by businesses around the world.

-Surveillance of workers.

-Aggressive motivation techniques. Yell until the task gets done.

-Rude management. Taking skills for granted.

-No efforts to retain employees. High turnover rates.

-Lack of communication at the workplace.

-Change workers as soon as they are burned out or exhausted.

Conclusion: how the smoking ban in bars hurt the economy

It used to be that people went to bars to have conversation, the kind of conversation that often identified problems and solutions to those problems were being discussed. By banning smoking in bars, the effect was simply for people to move from bars to “louder” places where conversation could not take place.

Almost every city now has a lack of space for people to engage in conversation in. It used to be the bars, but most countries are yet to have found a replacement for that. Lack of conversation also means that often people feel that their egos are repressed, thus engage in more ego-boosting activities such as luxury spending, gambling and risky investments. Had they had that conversation at the bar, they probably would have shunned such risky behavior. So between a few lung cancer patients (many smokers quit before the damage is done but still enjoy being at the bar with other smokers) or people spending recklessly to feel valued when they could feel valued with light conversation at the bar.

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