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March 12, 2009

Less selfish capitalism

Fantastic article from today`s FT. The subject itself can interest anyone. But for the discussions we are having specifically on MBE, towards the end of it the author criticises continuously changing. For some that coulr read as a criticism to the whole notion of continuously improving in order to achieve customer requirements and sustainable success in an ever changing reality. I would not agree.
A few days ago I was having that discussion with a friend that works as a business consultant in Brazil. I was defending the concept of constancy of purpose of Deming and he was going against it. He said we always needed to change. I had to explain here that he was mixing different levels of decision. Of course a company has to always change, because the world changes and if the one does not changes it will simply be left behind. As simple as that. But changing is just a way to allow the bigger objective that should not be changed reachable under circumstances that are always new. For example, if taken that concept described on the article bellow that we should create an economy based on values that are more human that should be a constant vision, considered not only on time of crisis like now, but also on the good times. But to do that we will need to constantly improve, learn and improve how to do it. The purpose is always constant (and the deeper it is, the less changed it should go through. For instance you could say that you major life objective -Being happy?- should never change) or should change very seldom, but the strategy the tactics should constantly change, constantly improve.
It took me quite a while to make him understand my point. It is not easy, and I applied the same thinking to the understanding of this article, specially to the bit on the end.

Now is the time for a less selfish capitalism

By Richard Layard

Published: March 11 2009 20:02 | Last updated: March 11 2009 20:02

What is progress? The Organisation for Economic Co-operation and Development has been asking this question for some time and the current crisis makes it imperative to find an answer. According to the Anglo-Saxon Enlightenment, progress means the reduction of misery and the increase of happiness. It does not mean wealth creation or innovation, which are sometimes useful instruments but never the final goal. So we should stop the worship of money and create a more humane society where the quality of human experience is the criterion. Provided we pay ourselves in line with our productivity, we can choose whatever lifestyle is best for our quality of life.

And what would that involve? The starting point is that, despite massive wealth creation, happiness has not risen since the 1950s in the US or Britain or (over a shorter period) in western Germany. No researcher questions these facts. So accelerated economic growth is not a goal for which we should make large sacrifices. In particular, we should not sacrifice the most important source of happiness, which is the quality of human relationships – at home, at work and in the community. We have sacrificed too many of these in the name of efficiency and productivity growth.

Most of all we have sacrificed our values. In the 1960s, 60 per cent of adults said they believed “most people can be trusted”. Today the figure is 30 per cent, in both Britain and the US. The fall in trustworthy behaviour is clear in the banking sector but can also be seen in family life (more break-ups), in the playground (fewer friends you can trust) and in the workplace (growing competition between colleagues).

Increasingly, we treat private interest as the only motivation on which we can rely and competition between individuals as the way to get the most out of them. This is often counterproductive and does not generally produce a happy workplace since competition for status is a zero-sum game. Instead, we need a society based on positive-sum activities. Humans are a mix of selfishness and altruism but generally feel better working to help each other rather than to do each other down.

Our society has become too individualistic, with too much rivalry and not enough common purpose. We idolise success and status and thus undermine our mutual respect. But countries vary in this regard, and the Scandinavians have managed to combine effective economies with much greater equality and mutual respect. They have the greatest levels of trust (and happiness) of any countries in the world.

To build a society based on trust we have to start in school, if not earlier. Children should learn that the noblest life is the one that produces the least misery and the most happiness in the world. This rule should apply also in business and professional life. People should do work that is useful to society and does not just make paper profits. And all professions – including journalism, advertising and business – should have a clear, professional, ethical code that its members are required to observe. It is not for nothing that doctors form the group most respected in our society – they have a code that is enforced and everyone knows it.

So we need a trend away from excessive individualism and towards greater social responsibility. Is it possible to reverse a cultural trend in this way? It has happened before, in the early 19th century. For the next 150 years there was a growth of social responsibility, followed by a decline in the next 50. So a trend can change and it is often in bad times (such as the 1930s in Scandinavia) that people decide to seek a more co-operative lifestyle.

I have written a book about how to do this and there is room here for three points only. First we should use our schools to promote a better value system – the recent Good Childhoodreport sponsored by the UK Children’s Society was full of ideas about how to do this. Second, adults should reappraise their priorities about what is important. Recent events are likely to encourage this and modern happiness research can help find answers. Third, economists should adopt a more realistic model of what makes humans happy and what makes markets function.

Three ideas taught in business schools have much to answer for. One is the theory of “efficient capital markets”, now clearly discredited. The second is “principal agent” theory, which says the agents will perform best under high-powered financial incentives to align their interests with those of the principal. This has led to excessive performance-related pay, which has often undermined the motive to work well for the sake of doing a good job and introduced unnecessary tension among colleagues. Finally, there is the macho philosophy of “continuous change”, promoted by self-interested consulting companies, which disregards the fundamental human need for stability – in the name of efficiency gains that are often not realised.

We do not want communism – as research shows, the communist countries were the least happy in the world and also inefficient. But we do need a more humane brand of capitalism, based not only on better regulation but on better values.

Values matter and they are affected by our theories. We do not need a society based on Darwinian competition between individuals. Beyond subsistence, the best experience any society can provide is the feeling that other people are on your side. That is the kind of capitalism we want.

Lord Layard is at the London School of Economics Centre for Economic Performance. He has written ‘Happiness’ (2005) and co-authored ‘A Good Childhood’ (2009)


December 25, 2008

Another one frim Martin Wolf

The best newspaper economy writer I know....for those who like economy remember, every wednesday on the FT



Keynes offers us the best way to think about the financial crisis

By Martin Wolf

Published: December 23 2008 18:06 | Last updated: December 23 2008 18:06

We are all Keynesians now. When Barack Obama takes office he will propose a gigantic fiscal stimulus package. Such packages are being offered by many other governments. Even Germany is being dragged, kicking and screaming, into this race.

The ghost of John Maynard Keynes, the father of macroeconomics, has returned to haunt us. With it has come that of his most interesting disciple, Hyman Minsky. We all now know of the “Minsky moment” – the point at which a financial mania turns into panic.

Like all prophets, Keynes offered ambiguous lessons to his followers. Few still believe in the fiscal fine-tuning that his disciples propounded in the decades after the second world war. But nobody believes in the monetary targeting proposed by his celebrated intellectual adversary, Milton Friedman, either. Now, 62 years after Keynes’ death, in another era of financial crisis and threatened economic slump, it is easier for us to understand what remains relevant in his teaching.

I see three broad lessons.

The first, which was taken forward by Minsky, is that we should not take the pretensions of financiers seriously. “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” Not for him, then, was the notion of “efficient markets”.

The second lesson is that the economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so.

The third and most important lesson is that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis.

Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge. He wished to preserve as much liberty as possible, while recognising that the minimum state was unacceptable to a democratic society with an urbanised economy. He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds.

This same moralistic debate is with us, once again. Contemporary “liquidationists” insist that a collapse would lead to rebirth of a purified economy. Their leftwing opponents argue that the era of markets is over. And even I wish to see the punishment of financial alchemists who claimed that ever more debt turns economic lead into gold.

Yet Keynes would have insisted that such approaches are foolish. Markets are neither infallible nor dispensable. They are indeed the underpinnings of a productive economy and individual freedom. But they can also go seriously awry and so must be managed with care. The election of Mr Obama surely reflects a desire for just such pragmatism. Neither Ron Paul, the libertarian, nor Ralph Nader, on the left, got anywhere. So the task for this new administration is to lead the US and the world towards a pragmatic resolution of the global economic crisis we all now confront.

The urgent task is to return the world economy to health.

The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended. Also important will be direct central-bank finance of borrowers. It is evident that much of the load will fall on the US, largely because the Europeans, Japanese and even the Chinese are too inert, too complacent, or too weak. Given the correction of household spending under way in the deficit countries, this period of high government spending is, alas, likely to last for years. At the same time, a big effort must be made to purge the balance sheets of households and the financial system. A debt-for-equity swap is surely going to be necessary.

The longer-term challenge is to force a rebalancing of global demand. Deficit countries cannot be expected to spend their way into bankruptcy, while surplus countries condemn as profligacy the spending from which their exporters benefit so much. In the necessary attempt to reconstruct the global economic order, on which the new administration must focus, this will be a central issue. It is one Keynes himself had in mind when he put forward his ideas for the postwar monetary system at the Bretton Woods conference in 1944.

No less pragmatic must be the attempt to construct a new system of global financial regulation and an approach to monetary policy that curbs credit booms and asset bubbles. As Minsky made clear, no permanent answer exists. But recognition of the systemic frailty of a complex financial system would be a good start.

As was the case in the 1930s, we also have a choice: it is to deal with these challenges co-operatively and pragmatically or let ideological blinkers and selfishness obstruct us. The objective is also clear: to preserve an open and at least reasonably stable world economy that offers opportunity to as much of humanity as possible. We have done a disturbingly poor job of this in recent years. We must do better. We can do so, provided we approach the task in a spirit of humility and pragmatism, shorn of ideological blinkers

As Oscar Wilde might have said, in economics, the truth is rarely pure and never simple. That is, for me, the biggest lesson of this crisis. It is also the one Keynes himself still teaches.


December 22, 2008

More thoughts on economy

Thinking a lot about economy lately. Interesting, I was a good economy student and did quite well In my Finance MBA. But I choose not to follow that  specific path in my career and I`m glad with the path I choose (that actually fell in my lap and I grabbed it!). However perhaps due to this credit crunch thing I`ve been thinking quite a lot about finance and macro economy. I guess that is because I`m seeing several things that for an economy student were legendary, were economical history kind of stuff unfolding right in front of my eyes. Funny. Who would guess people would turn back to Keynes. And Friedman has just died, he must be rolling inside his coffin with all this government spending , all this Keynesian policies on the work.

And gold! People are still buying gold to protect themselves! Why? Why for God`s sake? Gold has so little industrial-practical use nowadays that I see no sense in having it as value keepers in stressing times. The only real market they have know is for jewelry therefore the value of it is relying basically on human vanity! (ok, I now some sound systems rely on gold for quality of sound and probably there are other uses I`m not aware of, but not enough to justify all this relevance). I don`t see much difference in stoking gold and stoking any relatively reliable currency (dollar, euros, pounds…) and gold comes with the additional question of size, weight, transportation. Why do people still rely on gold?

I was thinking about that and trying to remember all the theories (economy as a science  was built on top of that discussion. Later we realised that putting value to things was just an easier way to compare things and therefore make choices. That`s why I like to define economy as a science of making choices assuming everything is scarce) around the value of things from uni years. There are quite a few, relating it to the amount of work, to the relative utility of the thing, considering offer and demand (on the short term) etc etc. Nothing fits into gold. It`s hard to get. Sure it is, but so are several other minerals. It`s relatively scarce, but several things a re relatively scarce. Offer and demand are surely controlled, like in any other market and that certainly contributes, but again it comes to use. Oil is controlled, but has a lot of use to it. The same with iron, soya, cotton, and all other commodities. But not gold. People have been fascinated and crazy about gold for centuries. And they still are. I can`t help thinking about those movies that show the earth after some catastrophic event and were water is rare (Mad Max being the biggest example) and people are crazy for it. In that situation would gold mind? In the future (I hope not) we might be protecting tankers filled with water, but will we be paying for it in gold? Don`t think (and actually I don`t think, unless something really catastrophic happens) that you should be stoking water in your houses. Surely the value of potable clean water will rise but if, let`s say, water is as valuable  as oil there will be Shell`s, Exxon`s, and so forth interested in cleaning water or making sea water potable for relatively affordable prices. So for an individual is just as useful stocking water as it is stocking gasoline now (sure enough one can go by without gasoline but not without water, but I think I made my point economically-wise).


October 31, 2008

Another one about the crediy crunch

I took that one from today`s Financial Times. Great article, not so easy as the other one, more technical but very enlightening...


What the British authorities should try now

By Martin Wolf

Published: October 30 2008 19:31 | Last updated: October 30 2008 19:31

The UK is in recession. The estimate of a decline of 0.5 per cent in the third quarter, after stagnation in the second quarter, ends the debate. This is the beginning of a lengthy and, quite possibly, deep recession. How long and how deep? The answer depends on what the authorities do.

This is the moment at which David Blanchflower, an external member of the monetary policy committee and professor of economics at Dartmouth College in the US, is entitled to say “I told you so”. Prof Blanchflower has voted for a cut on every occasion since October 2007. In retrospect, he was right to push strongly in this direction, usually against majority opinion on the MPC. His views on the economy deserve respect now.

Prof Blanchflower laid them out this week in aspeech delivered, quite appropriately, at Keynes College, University of Kent*. In this, to his credit, he avoids crowing too loudly. His principal points are that, first, the UK economy is likely to follow a downward path similar to that of the US; second, the risks of a sustained rise in inflationary expectations are non-existent; and, finally, the consequences of “constrained credit conditions” on an economy with rapidly declining asset prices are likely to prove devastating.

Thursday’s report from Nationwide that house prices dropped 14.6 per cent in the year to October underlines the last danger. Prof Blanchflower also relies on his experience as a labour economist to argue that the risks of a pass-through of higher prices of imports to price expectations were always small. Now, with collapsing commodity prices and the onset of the recession, the danger is falling prices, instead. Despite unprecedented recent intervention by governments, led by the UK, further tightening of credit has occurred. Even Charles Bean, deputy governor of the Bank of England for monetary policy, describes what is happening as “possibly the largest financial crisis of its kind in human history”.

So what is to be done? The starting point has to be monetary policy. My increasingly strong view is that the MPC must, at this juncture, rethink its stance from scratch. It cannot make sense for US rates to be at 1 per cent, while the UK’s are 4.5 per cent. In present circumstances, I would like to see UK rates down to 2.5 per cent.

Obviously, there is some risk of a further sterling collapse. In current circumstances, this has to be ignored. In fact, determined action may strengthen sterling, not weaken it. In his Mais lecture on Wednesday, Alistair Darling, the chancellor of the exchequer, helpfully gave the MPC the green light to ignore short-term inflation overshoots. He went out of his way, instead, to stress that the Bank enjoys “discretion about the horizon over which inflation is brought back to target”.**

So long as the Bank enjoys room to cut interest rates, it seems unnecessary to take any large discretionary fiscal actions, particularly since the fiscal position is sure to look ghastly. The chancellor states rightly that “to increase borrowing in a downturn is sensible”. He is right, too, to argue that the UK’s stock of debt is low by the standards of large high-income countries. But the deficits are large and sure to become far larger. Against this background, the absence of a clear strategy for returning to a more sustainable position in the medium term is a worry. Such a strategy is promised for the forthcoming pre-Budget report. It must be good. The UK cannot presume indefinitely on the patience of its creditors.

Both the Bank and the Treasury will also need to examine what they would do if official interest rates fell to zero. This looks highly likely for the US and is conceivable for the UK. That would be the moment for “helicopter money”, with cash sprayed around like confetti.

More pressing than discretionary fiscal action is getting the banks to lend. This is why they have been helped, in the first place. Unfortunately, their marginal cost of funds, plus required margins, is above rates they are expected to charge. This is why sharp cuts in official intervention rates are vital. Beyond that, the government may be forced to encourage direct lending by the Bank of England to large non-financial corporations or to offer temporary partial guarantees of loans to small businesses or households. The government must also understand that it may have to recapitalise the banks again. What is being raised so far is some 1 per cent of the combined assets of the principal banks. As the crisis unfolds, the needs could prove far bigger than that.

These are historic times. Given the origins of the crisis in the collapse of an asset price bubble and consequent disintegration of the credit mechanism, the way the recession will evolve remains obscure. The authorities must now focus all their attention on reducing its likely scale. But then they must ask themselves how such a gigantic mess occurred. On this the Mais lecture is silent. Yet every important safeguard failed. A government in power since 1997 cannot ignore this grim truth forever.

* Where next for the UK economy? www.bankofengland.co.uk; ** www.hm-treasury.gov.uk


October 20, 2008

Some real examples of greed.

Writing about Greed from Kang's blog

I was reading Kang`s (Louis) entry on his blog about greed. I`m sure he was inspired by the lecture we  attended on Friday about the credit crunch (by the way, great lecture this time the tutor spent quite sometime explaining some basic economy concepts that are fundamental to the understanding of the whole thing). I have my personal opinion about the CC, but I wanna talk about two things I`ve seen in my life, real stuff, real experience that will help illustrate both what the professor and Kang said.

1st. I`ve been working in banks for quite some years now. I`ve always worked on international Banks from different countries. I`ve worked in several different areas and projects. I`ve worked in some different cities as well. All these things change people. For example, working for a British bank is very different from working in an North-American one. Several differences in recognition policies, pace, style, priorities, etc etc. But there`s something that is ABSOLUTELY the same in every bank (and from my experience it is the same all over the world). The traders (these are the guys who really decide what to make with the banks money, were to lend, from whom to borrow, what rates to pay, what rates to accept, etc etc ) are young, addicted to gambling and taken risks, self-confident and VERYYYYYYYYYYY well paid. I`ve seen people with 28, 29 years old, little experience and no managing of people getting paid as much as people with a 25-30 years career, managing structures with hundreds of people, etc etc. They usually don`t have a high paycheck, but they`re bonuses.....It`s funny because most of them don`t stay that long as traders. They usually make a lot of money in a few years and them go to open they`re own business, go to work in other areas of the financial industry with a different profile (Mergers & Acquisitions, counselling, etc etc). I `ve asked many people (and human resource professionals as well!) why there was such a difference. The logical explanation is that it`s hard to find appropriate and qualified people from the job, and there are only very few spots. I think that explanation is not complete. It sure has it`s logic, but I don`t think it fully explains this because even though a certain profile (personality wise) is needed, the technical knowledge itself can be learned by anyone with a reasonable background in maths. The rest is pretty much a consequence. There`s another interesting explanation. It says that people are paid not for the amount of the money they bring to the organisation, but by the amount of money they can make the company loose. In the light of the credit crunch recent facts, that second explanation does make a lot of sense, doesn`t it?

2nd. I had a brilliant teacher on my MBA.  He is a reference in finance in Brazil and currently he is living in China, working as the head of the office for the second biggest Brazilian bank, working with corporate finance (http://en.wikipedia.org/wiki/Corporate_finance). He lectured us on International Iinance. In the place where I had my MBA we used the Harvad method, therefore we had a case to be studied for every class. We had 13 lectures with him, and 11 case studies, all of them about countries and companies that had somehow been through crisis. In the last day we did some discussion about the common causes. In this day he said something that I always remember when I think about the credit crunch
He got to us and he sad:
"We are all very clever now. Pointing the mistakes of several government officials from all over the world, several very senior economists. We must all been thinking that we would have been able to avod it because we are hear criticising it. But it`s not. First because each crise has it`s own dynamic, and as we all know history is really a mirror looking at the past. And besides that, that`s not how things work in real life. When these crises arrived, people knew there were problems coming but they could not do much to avoid it. First because we are eternal optimists, but mainly because all companies are driven by results, that`s not what they say and how they would like it to be. But when you look at your competitor making money, even though he`s taking more chances and risks, you just can`t say you are not going to make money because you think that this is dangerous., that can bring additional risks (off course respecting the law and all the banks regulations). That`s not how most companies work. You are always compared to your competitor. And don`t think another crise is not about to come, they`re always about to come because we are always relaxing our controls and thinking we are safe"
And he went on and talked about several potential crises we could face including the risk of a buble burst in the housing market in America (even though I`ve been hearing about the chance for YEARSSSS now..)..
But the point is, companies are frequently driven by short term greed in here too.
Well, that are two real stories I saw/heard that I hope will help illustrate Kang`s points.
Francisco

 


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