After a longish short break the black and white economy comes back to life today, prompted by a question from a rather hot-under-the-collar Andy Hoang, creator of one of the internet’s greatest delights: www.myrealwall.com
“I've been thinking a lot about the economy lately, since becoming a homeowner specifically and I think there are a few objects I would like to see explained.
Firstly, why on earth do bankers get bonuses? Obviously the issue is big right now and centers on the size of the figures but I want to know just why they get them at all. Why can't they do an honest days work for an honest days pay like the rest of us? Also what right do they have to demand a bonus when the economy is on their knees due to their actions? Surely this bonus thing must have historical roots but surely accountability should be held when such bonuses are rewarded and can't just be seen as something they are automatically entitled to right?”
Right, Andy, let’s get to the bottom of this.
Firstly, why on earth do bankers get bonuses?
There are some practical reasons, some of which I’d say are pretty valid. The most obvious:
Being a banker is not just a day job. If you choose banking, you choose to give away your life for that time. We need you to get up at 4.45am. We need you to be here until 2am. We need you on the next flight to Baghdad. We need you to say no to that holiday you’re going on tomorrow with your family. We need you to go grey prematurely. And you can’t say no. Essentially, the bank you work for simply compensates you for not having a life outside work and your lack of sleep.
In terms of a bank’s setup:
They produce profit out of virtually nothing. Their core cost is their staff and those people have to be the best – if a bank is going to produce profitable output, it needs only the best inputs (much like comparing posh bar of chocolate with a nasty, vegetable oil saturated one). Banks are very secretive places and very sophisticated places. Before you begin you will, in most cases, have gone through an intense selection process, been credit checked to death and be a pretty sharp individual in your own right. People who meet this criteria and are willing to go through this process are not cheap and need to be lured away from less challenging jobs with cold, hard cash. But it’s worth it because hiring these people at what seems to be ludicrous costs to us, has been calculated as necessary for the business to make money.
Ideological reasons:
Recently, in a lecture, Joseph Stiglitz said “the banks believed they changed the world” and used this to legitimate the bonuses they pay. I won’t go into much detail about how they apparently changed the world, but I’ll just advise everyone to think back to the commentary we were hearing until mid-2008 from many leaders that the financial world had changed, we had gone past boom and bust, we were never going to experience another bubble. The banks (and many public figures) truly believed they had cracked a secret code and deserved to be rewarded handsomely for this.
What right do they have to demand a bonus when the economy is on their knees due to their actions?
In economics, we assume that firms are profit maximisers. So, imagine you get billions and billions in cash injected into your company, or get the option to take this, even if you don’t need it. What do you do? You would be absolutely insane as a business-minded individual to not a) take this opportunity and b) use it for you’re your firm’s advantage. So, here’s the scenario – the banks have taken the cash at zero interest, invested it wisely (which is, of course, what they should do best in their line of business), and derived record profits at a time we’re all feeling pretty down. Thus, they have over-exceeded their targets for a bonus.
Now – you could very well say that the profits from this profit should go to the tax payer but, the snag is clear. If we go back to the assumption above – firms being profit maximisers – then it doesn’t take a lot of brain to work out that, if the bankers knew their bonuses would be taken away, they would have done nothing at all as they would have had no incentive to put in the work. Perhaps by demanding a profit share, governments thought they’d make the global economic situation even worse (i.e. less economic activity = more job cuts = even worse recession) but we will now never know.
Anyway, Andy, the answer to your question is that it’s been too difficult for anyone to get their head round this – for every seemingly good and justified idea, there is potentially an ultra negative outcome, making governments too scared to pursue anything controversial.
Surely accountability should be held when such bonuses are rewarded and can't just be seen as something they are automatically entitled to right?
For me, the phrase “you can’t teach an old dog new tricks” comes to mind to explain today’s situation. You’ll have heard the phrase “too big to fail” many times, no doubt. What does this mean? Large national and international banks have such an engrained presence in everyone’s everyday dealing that governments would rather bankrupt themselves, than see banks go down the drain. Now, imagine this: you mess up completely, you completely screw up and take down a load of people with you. Then, instead of being punished, someone just gives you a tap on the wrist and sets you on you merry way, tutting behind you “oh those crazy kids will they ever learn”. How do you feel? Invincible, untouchable and wrapped in indestructible body armour would be my guess – so even more convinced you’re entitled to those bonuses.
There you have it. Are you brave enough to mess with them?
lplatebigcheese
Photo credit: Xavier Arpino, wonderful friend, cameraman and photographer working on projects such as this one: http://web.me.com/letempestaire/Le_tempestaire/Accueil.html
More photos from Xav: http://www.flickr.com/photos/xavierarpino/
Sunday, 14 February 2010
Thursday, 5 November 2009
Trade Unions: friend or foe of the sick man of Europe
We face today the same story as thirty years ago.
Britain is the sick man of Europe. The economy’s a mess. We don’t like immigration. A key industry is being restructured… and being held back by industrial action.
It’s in dark times like these that it becomes more evident which businesses are working well and which are not. Something obviously needs to be done about the latter – a bad business eats up those finite resources far faster than a good one and that’s a terrible thing for the world.
And, Trade Unions become more powerful in tough conditions, obviously this is the time their influence soars. Of course they want to protect jobs. This is great, when it makes sustainable, economic sense.
What does today’s agreement between Royal Mail and the Communications Workers Union mean?
The short run
- No restructure
- Jobs retained
- We get our Christmas mail
- But: Royal Mail have annoyed so many people and companies that they’ve already turned to other customers. That means Royal Mail could instantly have less to do and have to cut jobs anyway.
The long run
- No restructure equals outdated infrastructure. The service is only going to get worse and cost everybody more.
- People’s jobs will remain. But there will be deep divisions which could make some people’s jobs far less enjoyable. There’s an even greater us and them culture.
- We’ll be in the same position again when this issue is reawakened (and it has to be).
Does it have to be like this? Unfortunately yes – this is human nature: uncertainty brings desperation, short term thinking and vulnerability. Trade Unions know this, and turn out to be some of the most effective middle men out there, very similar to those supermarkets we were discussing in the first entry of this blog. See below.
Britain is the sick man of Europe. The economy’s a mess. We don’t like immigration. A key industry is being restructured… and being held back by industrial action.
It’s in dark times like these that it becomes more evident which businesses are working well and which are not. Something obviously needs to be done about the latter – a bad business eats up those finite resources far faster than a good one and that’s a terrible thing for the world.
And, Trade Unions become more powerful in tough conditions, obviously this is the time their influence soars. Of course they want to protect jobs. This is great, when it makes sustainable, economic sense.
What does today’s agreement between Royal Mail and the Communications Workers Union mean?
The short run
- No restructure
- Jobs retained
- We get our Christmas mail
- But: Royal Mail have annoyed so many people and companies that they’ve already turned to other customers. That means Royal Mail could instantly have less to do and have to cut jobs anyway.
The long run
- No restructure equals outdated infrastructure. The service is only going to get worse and cost everybody more.
- People’s jobs will remain. But there will be deep divisions which could make some people’s jobs far less enjoyable. There’s an even greater us and them culture.
- We’ll be in the same position again when this issue is reawakened (and it has to be).
Does it have to be like this? Unfortunately yes – this is human nature: uncertainty brings desperation, short term thinking and vulnerability. Trade Unions know this, and turn out to be some of the most effective middle men out there, very similar to those supermarkets we were discussing in the first entry of this blog. See below.
Wednesday, 4 November 2009
The basic economic problem
Human wants are infinite; resources are finite. Therefore, how do you best divide these resources?
The answer is: efficiently.
It’s applicable anywhere. For instance, I always want to do a million things, all at once, but I only have limited amounts of time, energy, intelligence, beauty etc so I must set my sights on what I can achieve best when all these things are taken into account
At this very time, in fact, I have very little energy so surely the most efficient thing for me to be doing is NOT writing this blog and going to sleep.
Good night.
The answer is: efficiently.
It’s applicable anywhere. For instance, I always want to do a million things, all at once, but I only have limited amounts of time, energy, intelligence, beauty etc so I must set my sights on what I can achieve best when all these things are taken into account
At this very time, in fact, I have very little energy so surely the most efficient thing for me to be doing is NOT writing this blog and going to sleep.
Good night.
Tuesday, 3 November 2009
The market for rain
I’ll never forget one of Seinfeld's observations which went something like this “we love water, we drink bottles of it a day which come from all over the world, we shower in it, we bathe in it but as soon as it starts dropping out of the sky in small droplets, we just can’t get away from it.Aaaaaa! Get the umbrella, I’m getting wet, look at my hair, look at my jacket eeeeee, horrific stuff whatever did I do to deserve this?!?!”
And indeed it is this fear of rain which drives a huge global market we may seldom notice even exists.
Here’s just a sample of how rain makes a lot of people winners and losers:
Have you ever noticed how much busier taxi drivers are when it rains?
Have you ever noticed how umbrellas suddenly appear outside shop fronts when the first drop falls?
In Russia it is common practice for planes to release chemicals into the atmosphere which coats clouds to prevent rain from falling – this is especially helpful when there is a big military parade in red square.
Have you ever wondered how the council plans ahead for potential flooding to get people out of their house quick before they have to float people down the street in rowing boats?
Have you ever thought about the way stock prices change when it’s about to rain? One of the things traders get regular updates about is the weather forecast in order to help them decide what stocks to buy and sell that day. Forget risk management derivatives, just make friends with Michael Fish (just don’t ask about hurricanes).
To summarise: weather is money. And people know it – why on earth would so many coat manufacturers design coats which for some reason get totally ruined by rain so you need to replace it fast? It’s a coat for Christ’s sake, it’s meant to protect you from the elements, not fall apart faster than you do! But try taking it back to the shop and guaranteed you’ll be told it’s all your fault.
But we know the answer of course - it’s the economics of rain.
And indeed it is this fear of rain which drives a huge global market we may seldom notice even exists.
Here’s just a sample of how rain makes a lot of people winners and losers:
Have you ever noticed how much busier taxi drivers are when it rains?
Have you ever noticed how umbrellas suddenly appear outside shop fronts when the first drop falls?
In Russia it is common practice for planes to release chemicals into the atmosphere which coats clouds to prevent rain from falling – this is especially helpful when there is a big military parade in red square.
Have you ever wondered how the council plans ahead for potential flooding to get people out of their house quick before they have to float people down the street in rowing boats?
Have you ever thought about the way stock prices change when it’s about to rain? One of the things traders get regular updates about is the weather forecast in order to help them decide what stocks to buy and sell that day. Forget risk management derivatives, just make friends with Michael Fish (just don’t ask about hurricanes).
To summarise: weather is money. And people know it – why on earth would so many coat manufacturers design coats which for some reason get totally ruined by rain so you need to replace it fast? It’s a coat for Christ’s sake, it’s meant to protect you from the elements, not fall apart faster than you do! But try taking it back to the shop and guaranteed you’ll be told it’s all your fault.
But we know the answer of course - it’s the economics of rain.
Monday, 2 November 2009
Why is Andy’s council trying to take him to the cleaners?
You may have heard the story already. Andy Hoang, creator of myREALwall.com, is wanted by the council for apparently operating a business and generating an obscene amount of waste. £5,000 worth of waste apparently.
If you're not fimiliar with the story, Mr. Hoang runs www.myrealwall.com, a mailart website where he posts REAL postcards and the like which he receives on his acclaimed website. He recently received a letter instructing him to register his business or up to £5000 to account for all the extra waste he generates as Owner/Manager/Co Director.
Why?
Borough councils are just like any limited company, they make money and then they spend it. Despite the fact they’re there to look after us, they have to maximise their profit because otherwise they would lose money and we, as the ones who pay for them in the first place, would end up paying for this.
Councils spend money on: schools, hospitals, street cleaning, housing, social services, roads, etc etc etc
Councils collect money through: council tax, parking fines, government grants, advertising (i.e. hiring out poster sites), interesting cases such as Andy’s etc etc etc
Therefore, simple economic logic in this case would actually say the council is being completely reasonable because that’s what it is there to do. But, here’s the thing: how did Andy’s council calculate that he generates £5,000 worth of waste?
The simple answer is he doesn’t. The guys at the council have surely sat down and though about how much money they’d actually have to spend BEFORE they get any money from Andy.
Here’s what their list of tasks associated with extraction of money from Andy might look like:
Someone finds Andy’s postcard on the floor
Produces some paperwork about this
Submits the paperwork to a manager
Manager takes time to look at paperwork
Manager takes time to make decision
Decision goes through approval process
Manager does some administration
Passes all on to Administrator
Administrator raises some paperwork
Some kind of legal protocol is surely issued (and at some point time was spent on producing this)
Paperwork is sent to Andy
Paperwork will be tracked
Andy will retaliate and the process will carry on towards infinity.
The above process is just the tip of the iceberg and, in the end, even if Andy were to cough up £5k, the council and we would still be worse off. The irony is, if they had just asked him for £2 as a prize for tracing a random postcard all the way back to him, they’d probably be better off.
Being the council is not fun, it is never black and white, it is simply a big grey mess.
The article has even made the local paper! http://www.flickr.com/photos/andytgeezer/3995464606/
If you're not fimiliar with the story, Mr. Hoang runs www.myrealwall.com, a mailart website where he posts REAL postcards and the like which he receives on his acclaimed website. He recently received a letter instructing him to register his business or up to £5000 to account for all the extra waste he generates as Owner/Manager/Co Director.
Why?
Borough councils are just like any limited company, they make money and then they spend it. Despite the fact they’re there to look after us, they have to maximise their profit because otherwise they would lose money and we, as the ones who pay for them in the first place, would end up paying for this.
Councils spend money on: schools, hospitals, street cleaning, housing, social services, roads, etc etc etc
Councils collect money through: council tax, parking fines, government grants, advertising (i.e. hiring out poster sites), interesting cases such as Andy’s etc etc etc
Therefore, simple economic logic in this case would actually say the council is being completely reasonable because that’s what it is there to do. But, here’s the thing: how did Andy’s council calculate that he generates £5,000 worth of waste?
The simple answer is he doesn’t. The guys at the council have surely sat down and though about how much money they’d actually have to spend BEFORE they get any money from Andy.
Here’s what their list of tasks associated with extraction of money from Andy might look like:
Someone finds Andy’s postcard on the floor
Produces some paperwork about this
Submits the paperwork to a manager
Manager takes time to look at paperwork
Manager takes time to make decision
Decision goes through approval process
Manager does some administration
Passes all on to Administrator
Administrator raises some paperwork
Some kind of legal protocol is surely issued (and at some point time was spent on producing this)
Paperwork is sent to Andy
Paperwork will be tracked
Andy will retaliate and the process will carry on towards infinity.
The above process is just the tip of the iceberg and, in the end, even if Andy were to cough up £5k, the council and we would still be worse off. The irony is, if they had just asked him for £2 as a prize for tracing a random postcard all the way back to him, they’d probably be better off.
Being the council is not fun, it is never black and white, it is simply a big grey mess.
The article has even made the local paper! http://www.flickr.com/photos/andytgeezer/3995464606/
Sunday, 1 November 2009
The supermarket
The supermarket is a phenomenal force, it’s pretty difficult to imagine life without it.
We’re surely all familiar with the success of the supermarket as a business model. It’s probably fair to say that just a few players are close to world domination. Tesco, for instance, already has 58 stores in China after opening the first one in 2007 – there are over 3,700 Tesco stores worldwide.
Putting this all into economic context, we could say that supermarket chains are scrambling to get to a point where the can enjoy the benefits of being both a monopoly and a monopsony.
Monopoly: a market situation in which a single seller controls the entire output of a particular good or service.
Monopsony: the situation in which there is only a single buyer in a market.
Both situations carry huge implications for the firm, if there’s no competition they take every penny that falls into that market. That also means huge implications for anyone who deals with them as a consumer or producer. For instance – it would be reasonable to assume that, if there is just one seller or buyer, you’re going to pay more for what you buy, and receive less for what you sell. Which of course sounds bad, and brings to mind scenes of milk being poured down drains.
But it’s a funny one. Look at how we live now and many people will say our “quality of life is much higher than ever before”. The supermarket almost certainly has something to do with it: our average spend on food has decreased substantially (when measured as a proportion of our total spending on everything) and we can spend our money on much more fun things. How did the supermarket make this happen? Though monopsonist tactics.
Since firms as big as Walmart, who own Asda, have buckets of “buying power” – they can dictate prices to producers of biscuits, eggs, umbrellas because they know they can sell massive volumes – can you imagine how many loafs of bread are sold through Tesco’s 3,700 stores? Thus, they buy from producers in bulk, and we know that usually means hefty discounts. So, you could say that they’ll make one baker unhappy and millions of people very happy when they pay him a meagre amount for his bread, and sell it to us for a bargain price to get one over on the competition.
And who doesn’t love a bargain?
Which surely makes you realise that the supermarket, one of the world’s most successful middlemen, know us all too well and knows we’ll always be back for more. It’s true, no?
