It is easy to mistaken risk for uncertainty. They are different things.
Risk can be covered by institutional arrangement, but not uncertainty.
There may be risk to the system, but uncertainty prevails for the individual.
While the recession may present a risk to the economy, the individual faces grave uncertainty over his economic future.
A recession may present a great opportunity for the economy to renew itself, the same recession may be the end of the economic fortune of one individual - but an opportunity for great fortune for another.
In the simple case of insurance, for example, where statistical theory is applied, the probability of a person being killed by a car while crossing a road death may be 10% for the whole population. But the probability of a particular person being knocked down by a car and die is zero or one to the person.
The insurance industry takes a immortal view, while an individual takes a personal view.
In economic life, an individual faces grave uncertainty over his future. He fears he has no food and no place to stay in future - this is the worry of the modern person.
He fears the unknown - that which will happen in the next moment or the moment after next.
It is this great fear of the unknown that individuals strive to store up food and shelter for the future - which in the modern money-using exchange markets, the item most desired by individuals is called "asset."
It used to be called "money" when money was an asset.
With the debasement of money by modern policy makers, particularly central bankers, through the pursuit of loose monetary policy or quantitative easing, money has become a useless commodity.
New items come up in the minds of the people which they think are assets - assets are things that people treasure but which they cannot consume and they end up sitting on them in the hope of releasing their utility some time in the future.
One can therefore go through any range of durable objects. Do not laugh at the ancients over stone money or shells. Modern people treasure even computer numbers stored in certain places.
But every durable object that has been considered to be valuable by individual human beings, when the supply is unlimited has been shown to be rendered useless in value - by the very simple operation of the market supply and market demand.
Even houses, the Japanese has shown, can be a liability. Houses are, after all, spaces created by partitions called walls which people put around themselves when they are fed up with society or when they fear animals (as animals take on human shapes).
In those spaces called houses, like-minded animals of all kinds live with their own kinds - to reduce uncertainty - because they know how their kind behave or will behave in future under various stereotyped scenarios - until the pet dog chews up the human baby.
So, in the face of uncertainty which naturally exists in the minds of human beings as a result of the creation of the concept called time, individual human beings have been acting very strangely - to waste time in the present over unncessary things in order to secure time in the future that does not exist.
The only uncertainty in human society is human behaviour under varying conditions. If your friend will not feed you when you have no money and are hungry, the uncertainty is that of the friendship - not the future which does not exist.
You accumulate riches because you have no friends who will take care of you when you have nothing.
The society with the greatest amount of artificial man-made market-oriented assets is the most friendless society - because one does not have to be nice and make friends.
Poor people have to be friendly to each other because they need each other all the time - who knows who will need who at this moment or the next.
The current global economic recession is the result of too much supply of assets which now do not have value in the market - because of oversupply.
The answer is to reduce the oversupply by downsizing the industries that are overproducing and move human and other natural resources in areas of activities for which there could be greater appreciation by fellow people - charity, compassion, generosity, laughing, being nice.
The world worries about the future while ignoring the present.
That is the risk we all take when reacting to uncertainty.
Tuesday, May 19, 2009
Thursday, May 7, 2009
Concept III: Market
The market is the exchange market.
The market is where people can trade what they do not want for what they want.
The first problem that arises from the market is the price - the terms of trade.
What is the "fair" price?
In rudimentary markets, the price is set by the trader who has the most holding power - and I presume that comes from his "capital".
If he can hold and wait, then, if he waits long enough, he may get the price he wants.
If not, then he will "dump" in the market.
The market price therefore does not really reflect the true value of a product - either use value or exchange value.
But the important thing is that the market exists for trading purpose - whatever the price, it be better than be landed with lots of things you do not want with no outlet to trade.
To improve one's terms of trade, one must have (a) the technology to produce, (b) the capacity to produce, and (c) the willing to please others mostly strangers but who are quite prepared to trade with you.
At the end of the day, one's wealth comes from one's ability and capacity.
The trading only allows for variety but not the overall capacity.
In a closed market, the lack of demand may discourage effort.
In an open market, there may be enormous incentive to strive to expand one's capacity - and to specialise for greater efficiency of production.
But when there is overcapacity, production will have to slow down or halted as inventory piles up.
This overcapacity will usually be in a few products, and this could be due to bunching of investments - I would attribute it to lack of innovation and ideas - the drive for competitiveness leads everyone to focus on the same types of products - commodities.
In such a situation, price adjustments allow others with capital to take over the failed operations - or rather failed management of perhaps viable operations.
When one or two operations fail, it is incompetence on the part of the operators.
When all operators fail, it is systemic error - something wrong with the workings of the system.
Rules and regulations must be changed or imposed - to prevent explosion and implosion of the system.
The collapse of the market leads one to the closed market of oneself.
In a closed market, specialisation becomes a disadvantage.
You eat rice with salt everyday.
The market is where people can trade what they do not want for what they want.
The first problem that arises from the market is the price - the terms of trade.
What is the "fair" price?
In rudimentary markets, the price is set by the trader who has the most holding power - and I presume that comes from his "capital".
If he can hold and wait, then, if he waits long enough, he may get the price he wants.
If not, then he will "dump" in the market.
The market price therefore does not really reflect the true value of a product - either use value or exchange value.
But the important thing is that the market exists for trading purpose - whatever the price, it be better than be landed with lots of things you do not want with no outlet to trade.
To improve one's terms of trade, one must have (a) the technology to produce, (b) the capacity to produce, and (c) the willing to please others mostly strangers but who are quite prepared to trade with you.
At the end of the day, one's wealth comes from one's ability and capacity.
The trading only allows for variety but not the overall capacity.
In a closed market, the lack of demand may discourage effort.
In an open market, there may be enormous incentive to strive to expand one's capacity - and to specialise for greater efficiency of production.
But when there is overcapacity, production will have to slow down or halted as inventory piles up.
This overcapacity will usually be in a few products, and this could be due to bunching of investments - I would attribute it to lack of innovation and ideas - the drive for competitiveness leads everyone to focus on the same types of products - commodities.
In such a situation, price adjustments allow others with capital to take over the failed operations - or rather failed management of perhaps viable operations.
When one or two operations fail, it is incompetence on the part of the operators.
When all operators fail, it is systemic error - something wrong with the workings of the system.
Rules and regulations must be changed or imposed - to prevent explosion and implosion of the system.
The collapse of the market leads one to the closed market of oneself.
In a closed market, specialisation becomes a disadvantage.
You eat rice with salt everyday.
Wednesday, May 6, 2009
Concept II: Value
What is the value of a resource?
1. If without it, you die - then, its priceless to you.
That resource is air, water and nutrients.
They have Use Value - and, in this case, I would call them Life Use Value.
It is not strange that almost everything that is critical to life is everywhere free and in abundance.
It is that they are freely abundant that life as we know it is so plentiful.
I would even contend that the sheer size of the human population today is the result of the great availability of air and water as well as the great success that human beings have in obtaining nutrients.
In the processing of scrambling for nutrients, human beings seem to be degrading the quality of their air and water.
If the trend continues, human beings worry but not Mother Nature.
There would simply be less humans - and life as we know it to be.
Other forms of life will take over - and be born with masks over their noses and mouths.
But for now, let us acknowledge that it is Mother Nature that is nourishing life.
Which means that:
>It is quite possible to live life simply and get on with it.
> Life has come so far through the thousands of years.
Traditional life as preserved in rural life around the world, including Malaysia, is ancient civilisation in less dramatic terms.
Rural life is priceless.
2. Modernisation vs Exchange Value
Life in the urban centre is a production of the Industrial Revolution and, I would quickly add, of the IT Revolution and, why not, Globalisation.
We have gone way past Adam Smith's idealisation of the benefits of specialisation and the economies of scale.
We are in the Age of the Great Abundance of industrial products - fascinating sophisticated products which have us all mesmerised over the greatness of humans but not of Mother Nature.
The industrial gadgets are the symbols of Modernisation which have been spread throughout the world through Global Exchange.
The rural folks with their rich cultural lives look at the industrial gadgets of the urban folks and get extremely jealous.
The opportunity cost of the modernisation and the urban life is the cultural richness of the rural life.
1. If without it, you die - then, its priceless to you.
That resource is air, water and nutrients.
They have Use Value - and, in this case, I would call them Life Use Value.
It is not strange that almost everything that is critical to life is everywhere free and in abundance.
It is that they are freely abundant that life as we know it is so plentiful.
I would even contend that the sheer size of the human population today is the result of the great availability of air and water as well as the great success that human beings have in obtaining nutrients.
In the processing of scrambling for nutrients, human beings seem to be degrading the quality of their air and water.
If the trend continues, human beings worry but not Mother Nature.
There would simply be less humans - and life as we know it to be.
Other forms of life will take over - and be born with masks over their noses and mouths.
But for now, let us acknowledge that it is Mother Nature that is nourishing life.
Which means that:
>It is quite possible to live life simply and get on with it.
> Life has come so far through the thousands of years.
Traditional life as preserved in rural life around the world, including Malaysia, is ancient civilisation in less dramatic terms.
Rural life is priceless.
2. Modernisation vs Exchange Value
Life in the urban centre is a production of the Industrial Revolution and, I would quickly add, of the IT Revolution and, why not, Globalisation.
We have gone way past Adam Smith's idealisation of the benefits of specialisation and the economies of scale.
We are in the Age of the Great Abundance of industrial products - fascinating sophisticated products which have us all mesmerised over the greatness of humans but not of Mother Nature.
The industrial gadgets are the symbols of Modernisation which have been spread throughout the world through Global Exchange.
The rural folks with their rich cultural lives look at the industrial gadgets of the urban folks and get extremely jealous.
The opportunity cost of the modernisation and the urban life is the cultural richness of the rural life.
Concept I: Opportunity Cost
Opportunity cost is the most important concept in economics - being the most fundamental.
Take any resource - land or natural resources.
The environmentalist would think of the rainforest or the ozone layer.
The Classical Economists do not allow you to take money because money is considered a "veil" which covers the real stuff. But the modern person would think of money as a resource - and herein lies his misery.
And I would add "time" - because without it, the game is over for life as we know it.
The idea behind the concept of the "opportunity cost" is that there is a cost to the opportunity for using that a particular quantity of the resource.
A particular quantity because if you have, say, a lump of coal and you burn it, then that lump of coal is no more.
You have used up the opportunity for using that lump of coal for some other purpose - such as for drawing - because you have used up the lump of coal for burning - in order to cook, for example.
Ah, you say, but there is more coal where it comes from, so there is nothing to worry about.
But the economist would say - given that you have the lump of coal now - however you are going to make use of that lump of coal, you are going to deprive yourself of the opportunity of using that lump of coal for some other purpose.
That some other purpose is the opportunity cost of burning that lump of coal.
Axiom:
If there are two uses A and B for a resource R, the opportunity cost of using R for A is B and the opportunity cost of using R for B is A.
Examples:
1. The opportunity cost of blogging is family bonding - because you are too intent on writing.
2. The opportunity cost of making money is living the life you want it - you may have been a good child to your parents by passing exams and getting a job and a family and have foregone your dream of being a blues guitarist or a cartoonist.
3. The opportunity cost of having ebony furniture is global warming - because you have caused old rainforest trees to be chopped down for exports.
4. The opportunity cost of living is the happiness you have dreamt of and never enjoyed - because you have followed a routine or a way of life which has been set by social convention or by the mainstream economic system that you do not appreciate.
In other words, there is a cost to everything you do.
So you have to make sure that the things you do are really the things you really want to do.
For society as a whole, the implications of opportunity cost are:
1. The opportunity cost of politicking is peace and harmony.
2. The opportunity cost of building the national car is industrial innovation which our young people are good at.
3. The opportunity cost of bailout is the macroeconomic adjustment in all major local markets.
4. The opportunity cost of consumerism is a simple and contented life - because of the time spent shopping for happiness rather than be happy with what we already have.
Take any resource - land or natural resources.
The environmentalist would think of the rainforest or the ozone layer.
The Classical Economists do not allow you to take money because money is considered a "veil" which covers the real stuff. But the modern person would think of money as a resource - and herein lies his misery.
And I would add "time" - because without it, the game is over for life as we know it.
The idea behind the concept of the "opportunity cost" is that there is a cost to the opportunity for using that a particular quantity of the resource.
A particular quantity because if you have, say, a lump of coal and you burn it, then that lump of coal is no more.
You have used up the opportunity for using that lump of coal for some other purpose - such as for drawing - because you have used up the lump of coal for burning - in order to cook, for example.
Ah, you say, but there is more coal where it comes from, so there is nothing to worry about.
But the economist would say - given that you have the lump of coal now - however you are going to make use of that lump of coal, you are going to deprive yourself of the opportunity of using that lump of coal for some other purpose.
That some other purpose is the opportunity cost of burning that lump of coal.
Axiom:
If there are two uses A and B for a resource R, the opportunity cost of using R for A is B and the opportunity cost of using R for B is A.
Examples:
1. The opportunity cost of blogging is family bonding - because you are too intent on writing.
2. The opportunity cost of making money is living the life you want it - you may have been a good child to your parents by passing exams and getting a job and a family and have foregone your dream of being a blues guitarist or a cartoonist.
3. The opportunity cost of having ebony furniture is global warming - because you have caused old rainforest trees to be chopped down for exports.
4. The opportunity cost of living is the happiness you have dreamt of and never enjoyed - because you have followed a routine or a way of life which has been set by social convention or by the mainstream economic system that you do not appreciate.
In other words, there is a cost to everything you do.
So you have to make sure that the things you do are really the things you really want to do.
For society as a whole, the implications of opportunity cost are:
1. The opportunity cost of politicking is peace and harmony.
2. The opportunity cost of building the national car is industrial innovation which our young people are good at.
3. The opportunity cost of bailout is the macroeconomic adjustment in all major local markets.
4. The opportunity cost of consumerism is a simple and contented life - because of the time spent shopping for happiness rather than be happy with what we already have.
Tuesday, May 5, 2009
Preserving Wealth
The rich and the poor have one thing in common - worry over money and wealth.
One worry over what they have not; the other over how to keep it.
Preserving wealth is as difficult as finding it - it is a full-time job.
Those who have inherited it found their wealth locked in real assets.
It's real, but you can't eat it.
I know of children who'd spent the rest of their lives trying to unlocking the value and transform it into liquidity.
Those who have made their fortune in business found their wealth locked in the business - or more specifically, the stocks of the trade. They get killed by obsolescence, or the disinterest or incompetence of their children, or the dishonesty of their old staff.
Those who have little have a house or two, a car or two, and some cash which they try to grow at a rapid speed. They end up speculating their little cash in the stock market.
Those who are cleverest are those who have invested in the education of their children - for the wealth gets converted, if they are properly brought up, into values which do not die.
At the end of the day, the value of wealth gets measured in terms of houses or property and location. (Wah, he has some many houses and so many pieces of land.)
Shares and cash are merely different modes of holding that wealth - for spending.
To sum it up, those who are really rich are those who become wealthy when others become poor.
Those who are rich but not that rich as their wealth is eroded by inflation is when they are rich because the whole society becomes rich.
But those who are poor are not poor when they do not know poverty.
Those who are miserable are those who do not accept the situation they found themselves in. They are to be pitied.
One worry over what they have not; the other over how to keep it.
Preserving wealth is as difficult as finding it - it is a full-time job.
Those who have inherited it found their wealth locked in real assets.
It's real, but you can't eat it.
I know of children who'd spent the rest of their lives trying to unlocking the value and transform it into liquidity.
Those who have made their fortune in business found their wealth locked in the business - or more specifically, the stocks of the trade. They get killed by obsolescence, or the disinterest or incompetence of their children, or the dishonesty of their old staff.
Those who have little have a house or two, a car or two, and some cash which they try to grow at a rapid speed. They end up speculating their little cash in the stock market.
Those who are cleverest are those who have invested in the education of their children - for the wealth gets converted, if they are properly brought up, into values which do not die.
At the end of the day, the value of wealth gets measured in terms of houses or property and location. (Wah, he has some many houses and so many pieces of land.)
Shares and cash are merely different modes of holding that wealth - for spending.
To sum it up, those who are really rich are those who become wealthy when others become poor.
Those who are rich but not that rich as their wealth is eroded by inflation is when they are rich because the whole society becomes rich.
But those who are poor are not poor when they do not know poverty.
Those who are miserable are those who do not accept the situation they found themselves in. They are to be pitied.
Redistributing Wealth
It is tempting to feel indignant when seeing sharply skewed distribution of wealth.
One feels compelled to act.
But one must be careful.
It is important not to justify one's actions, especially harsh or unreasonable ones, with a sense of righteous indignation.
In recent history, property owners of all kinds, including of intellectual property, had suffered under the heavy hands of social justice.
They could have been punished for knowing how to operate the prevailing system well.
It is important to learn how to play the game, or improve it, instead of trying to create a completely new system.
Do tough times justify calling for strong leaders?
Strong leaders can be kind - or cruel.
It is better to redistribute wealth through a system that promotes fairness and opportunities for all.
One feels compelled to act.
But one must be careful.
It is important not to justify one's actions, especially harsh or unreasonable ones, with a sense of righteous indignation.
In recent history, property owners of all kinds, including of intellectual property, had suffered under the heavy hands of social justice.
They could have been punished for knowing how to operate the prevailing system well.
It is important to learn how to play the game, or improve it, instead of trying to create a completely new system.
Do tough times justify calling for strong leaders?
Strong leaders can be kind - or cruel.
It is better to redistribute wealth through a system that promotes fairness and opportunities for all.
Saturday, May 2, 2009
The Distribution Of Wealth IV: Growth
The distribution of wealth can have a profound impact on the nature of future economic growth.
Just as the nature of past economic growth will have a profound impact on the distribution of growth.
Growth depends on a balance between investment and consumption.
The peculiarity of the main global economic system is that there is a constant need for investment in order for the economy to grow.
Economic growth stops the moment there is a hiccup in investment - and the economy will then go into a downward spiral.
To ensure sustainable growth, there must be persistent investment. This means that the economy must rise above subsistence in order to have the capacity to save and investment.
The only way to rise above subsistence throughout the economy is for investment to take place in knowledge and thinking.
People must know how to think for themselves.
Let there be no ignorant for the ruthless to exploit.
This means that the distribution of wealth over time should be focus more on the professional class. There should be no elite and the unfortunate lower group should be assisted with a social safety net.
If growth of the economy has traditionally been based on the exploitation of natural resources or the use of low wage unskilled workers, the distribution of wealth will be skewed to the top elite.
Growth, in this case, will be reflected in poorly designed industries.
There will be haphazard expansion, with a small urban centre and a sprawling low-cost housing.
There will be traffic jam because of the long distances the poor has to travel in poor modes of private transportation.
Public transportation would be inadequate and cramped.
A rich society must necessarily be well-designed and clean, with a healthy society with people are intelligent and optimistic.
They keep living in the present and invest in the future.
The well-being of the whole society will be the contribution of every able individuals.
There will be no strong personality who preach strong leadership.
It will be a society governed by the people for each other.
Just as the nature of past economic growth will have a profound impact on the distribution of growth.
Growth depends on a balance between investment and consumption.
The peculiarity of the main global economic system is that there is a constant need for investment in order for the economy to grow.
Economic growth stops the moment there is a hiccup in investment - and the economy will then go into a downward spiral.
To ensure sustainable growth, there must be persistent investment. This means that the economy must rise above subsistence in order to have the capacity to save and investment.
The only way to rise above subsistence throughout the economy is for investment to take place in knowledge and thinking.
People must know how to think for themselves.
Let there be no ignorant for the ruthless to exploit.
This means that the distribution of wealth over time should be focus more on the professional class. There should be no elite and the unfortunate lower group should be assisted with a social safety net.
If growth of the economy has traditionally been based on the exploitation of natural resources or the use of low wage unskilled workers, the distribution of wealth will be skewed to the top elite.
Growth, in this case, will be reflected in poorly designed industries.
There will be haphazard expansion, with a small urban centre and a sprawling low-cost housing.
There will be traffic jam because of the long distances the poor has to travel in poor modes of private transportation.
Public transportation would be inadequate and cramped.
A rich society must necessarily be well-designed and clean, with a healthy society with people are intelligent and optimistic.
They keep living in the present and invest in the future.
The well-being of the whole society will be the contribution of every able individuals.
There will be no strong personality who preach strong leadership.
It will be a society governed by the people for each other.
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