Caroline > Books: economics‎ (17)

The top 25 developed nations have government debts (as bonds) of over $33 trillion each, and it is rising every day.

Since 2000 interest rates have declined to astonishingly low levels This is bad for savers, any of whom are old people living off their savings......so instead of putting their money in savings, they turn to the bond markets.

Now for a teensy bit of math:

Say you buy a bond for $100 at 5%, which pays annually. The bond would be worth $105 one year later.
Now, imagine the central bank increases interest rates to 7%....this means that market interest rates will rise too.
Therefore no-one would want to buy your 5% bond at $100 because they could now get 7% out on the market.
Therefore if you want to sell your bond you would have to adjust the selling price down, to compensate for the new market interest rate.
As a result your bond would only be worth $98.13 to the buyer, rather than the $100 you originally paid for it. If you were forced to sell today you would make a loss.

Now, lets imagine the opposite:

Some terrible economic news has been announced, and the central bank reduces interest rates to 3%.
You now own a bond paying an interest rate that is higher than what is on offer in the market.

If you were to sell now the buyer would have to compensate you with a price higher than the original $100. You bond would now be worth $101.94.
The fixed coupon rate is higher than what's available on the market, and you can now sell your bond and make a profit.

The new market rate is called the "yield".

INTEREST RATE MARKETS AND BONDS

Using bonds, you can buy and hold a bond to maturity, or you can trade the interest rate markets, guessing the direction of interest rates, and make money this way. This is the essence of bond trading.

ANOTHER MATHEMATICAL RULE ABOUT BONDS.

The longer the maturity of a bond, the more its price moves when yields change.

Say you bought a 30-year maturity bond with a 5% coupon (interest rate).
Yields then fall from 5% to 3%
The price of the bond would rise from $100 to just over $139.
If yields rose to 7%, the price of the bond would fall to nearly $75.

So.......

If you can anticipate the movement of yields, you can make (or lose) money, by trading in and out of bonds as yields rise and fall.

The lower the yield, the larger the price movement when yields change.

LOW INTEREST RATES

Even before the 2008 crash the world was on a journey to lower and lower interest rates and bond yields.

Reasons given.....
Globalization
Increased competition
Technology
The decline in global inflation
The emergence of China

From the mid-1990s bond yields in general declined by one third - from about 6% to 4% across the bond markets.
In 2008 short term interest rates were slashed to zero.
And banks began the policy of quantitative easing.
This was intended to drive down long-term borrowing rates.
People were encouraged to take their savings out of the banks and grab the higher income from the bond market - while they lasted.
Globally, money flooded into bond mutual funds.
It was a rational response to an irrational world.
In just over 6 years the bond markets rose in size by 50%
Yields were driven down and investors were driven into the bond markets - because their income had all but evaporated.

BUT

Bonds had turned into something incredibly risky.
If bond yields rose at any point in the future, prices would plummet in a way never seen before.

eg.
A 30-year maturity bond yielding 2% (cost $100)
If yields rose to 4% then the price would drop to $65. This is a 35% loss.
Compare this to when the starting yield was 5%. An identical rise of 2% would only cause a 25% loss.

The lower the starting point when yields rise, the bigger the loss. Bonds are therefore now quite risky.

The world is stuffed with bonds.

eg.
Workplace pension funds.
Savings with the phrases "balanced" or "target return"
Your bank's reserves
The general public.

(The general public gets hold of bonds in the UK via the collective scheme OEICS - Open-ended investment companies)

This allows investors to pool their money into funds that they can buy and sell on a daily basis.

THE THREE RULES OF BOND INVESTING

1. If yields fall bond prices rise, and vice versa.

2. The longer the maturity of the bond, the more its price moves up or down when yields change.

3. The lower the yield (Caroline - or market interest rate I think), the larger the price movements when yields change.

eg
1% = low = big price movements when yields change.
10% = high = smaller price movements when markets change.

TELEVISION, AND THE QUALITY OF LIFE FOR WOMEN IN INDIA

Many initiatives have been instigated to improve the lives of women in India, where they are often treated badly, both as children and adults. None of these projects have been very successful. Then American economists Emily Oster and Robert Jensen compared villages with cable television, to those without television. They examined data from a government survey of 2,700 households, most of them rural.

In households with television...

Wife beating was less tolerated.

Parents were less likely to admit to having a preference for male children.

Women were more likely to exercise personal autonomy.

The families had a lower birthrate (associated with more autonomy and fewer health risks.)

They were more likely to keep their daughters in school.

MACROECONOMICS

Economists' predictions are generally worthless. They have a hard enough time explaining the past, much less predicting the future. (They are still arguing over whether Franklin Roosevelt's policy moves quelled The Great Depression or exacerbated it.)

It seems part of the human condition to believe in our own predictive abilities - and, just as well, to quickly forget how badly our predictions turned out to be.

SPORTY WOMEN ARE SUCCESSFUL

Betsey Stevenson discovered that girls who play high-school sports are more likely to attend college and land a solid job, especially in some of the high-skill fields traditionally dominated by men.

SELLING HOUSES BY YOURSELF ON THE INTERNET V SELLING VIA A REALTOR (ESTATE AGENT.)

With the latter you pay a commission of about $20,000 on a $400,000 house, and research shows that there are very few benefits.

If you do it yourself you must do it on the internet - on a website specialising in selling houses. Paying to do that costs just $150....but you have to do all the work yourself. Houses sold directly on the internet take an average of an extra 20 days to sell.

A third way is flat-fee real estate agents, and they are even MORE expensive than realtors.

BABY FORMULA MILK

The introduction of this allowed thousands of women to get right back into work.

FEMALE TEACHERS

100 years ago this was one of the few non-menial jobs available to women. At the time,6% of all working women were teachers, and by a large margin it was the choice of female college graduates. 55% of all college-educated female workers in their early thirties were employed as teachers.

Soon afterwards opportunities for smart women began to multiply, and they could enter law, medicine, business and finance....and there was a brain drain from teaching, and standards dropped.

WOMEN EXECUTIVES

Research has shown that gender discrimination plays only a minor role in holding women back.

Women take far fewer finance courses - and all being equal, there is a strong correlation between a finance background and career earnings.

Women also work fewer hours than men. A study of people completing their MBAs showed that women in the study worked 52 hours a week, whilst the men worked 58 hours a week.

The big issues seems to be that women love children.
Women with no children work 3% less hours than men.
Women with children work 24% less hours than men.

Women also take more career interruptions than men.

After 10 years in the workforce...

10% of men with MBAs went for 6 months or more without working.
40% of women with MBAs went for 6 months or more without working.

HIGH STATUS CONFERS LONGEVITY

Even amongst those nominated for the Nobel Prize. Winners live longer than those who have just been nominated but don't win.

People voted into The Baseball Hall of Fame outlive those were were narrowly omitted.

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CANCER

Chemotherapy helps with leukemia, lymphoma, Hodgkin's disease and testicular cancer....but in most cases it is pretty ineffective. There is a long list of cancers where chemotherapy has zero effect....multiple myeloma, soft tissue sarcoma, melanoma of the skin, and cancers of the pancreas, uterus, prostate, bladder, kidney, breast and lung. (Some oncologists argue that with these types of cancer chemotherapy helps one out of ten people.)

So why is chemotherapy used so much?

*Oncologists are amongst the highest-paid doctors.

*They typically derive more than half their income from selling and administering chemotherapy drugs.

*If they give a lung cancer patient an extra 2 months to live (when he only expected to live 4 months), on paper this will look an impressive feat. 'The doctor extended the patient;s remaining life by 50%.'

There has been little difference in how many people die of cancer in the last 50 years. The age-adjusted mortality rate for cancer is essentially unchanged over the past half-century.
BUT.....

Over the same period age-adjusted mortality for cardiovascular disease has plummeted. From nearly 600 per 100,000 to beneath 300.

THEREFORE...

Many people who in previous generations died from heart disease are now living to die of cancer instead. So the statistics are better than they initially look.

Cancer death rates are falling amongst younger people:

People 20 or younger - mortality has fallen by over 50%
People 20 - 40 - Mortality has fallen by 20%.

This is an especially good result, as incidents of cancers in this age group have been rising. (Probably due to diet, behaviours and environmental factors.)

-----------------------------

HEART DISEASE

Deaths from heart disease have fallen substantially over the past few decades. Expensive treatments like grafts, angioplasties and stents have only had a very small impact.

The decline has come rather from the success of medications which treat high cholesterol and high blood pressure. This accounts for half the drop.

Much of the remaining decline has come from ridiculously cheap treatments like asperin, heparin, ACE inhibitors and beta-blockers.


HORSE TRAFFIC ACCIDENTS IN NEW YORK IN 1900 VERSUS CAR TRAFFIC ACCIDENTS IN NEW YORK IN 2007

1900 - Horse accidents claimed the lives of 1 out of every 17,000 residents.

2007 - Car accidents claimed the lives of 1 out of every 30,000 residents.

= People were nearly twice as like to die in 1900 from a horse accident than from a car accident today.

THE LAW OF UNINTENDED CONSEQUENCES IS OFTEN SEEN WHEN GOVERNMENT LEGISLATION IS PASSED.

eg governments who have tried to reduce trash by charging people for extra bags of trash.

1) Some people just stuff their existing bags more and more full (a tactic now known by trash officers around the world as "Seattle Stomp".

2) Others just dump their trash in the woods.

3) In Germany, trash tax-avoiders flused so much uneaten food down the toilets that the sewers became infested with rats.

4) A new garbage tax in Ireland generated a spike in backyard trash burning. St James's Hospital in Dublin recorded a near tripling of patients who had set themselves on fire while burning trash.

FORCEPS

These can save lives if a baby is stuck in the birth canal.

They are thought to have been invented early in the 17th century by an obstetrician called Peter Chamerlen. They worked so well that Chamberlen kept them a secret, sharing them only with sons and grandsons who continued in the family business.

It wasn't until the mid-18th century that they passed into general usage. The surgeon Atul Gawande says that millions of babies' lives were lost as a result of this hoarding.

DIRTY TIES

Doctors should be forbidden to wear ordinary ties, as these collect pathogens and are rarely laundered. Instead doctors should wear bow ties.

NITRATE FERTILIZERS

These are astonishingly cheap and effective. They feed our world. If we lost them we would only have fruit and animal products on special occasions, or they would only be eaten by the rich.

WHALE OIL AND OIL UNDERGROUND

In the 19th century whales were the economic engine that helped turn the USA into a powerhouse. Every inch of whales could be used. Most valuable was whale oil, a lubricant for all sorts of machinery but also for lamps.

In the 19th century there were 900 whaling ships, 735 of them were in the USA.

1835 - 1872 An average of 7,700 whales a year were killed. It was the fifth largest industry in the US.

Then the industry was exhausted through over-whaling, and it begun to fail. That is when a retired railway man called Edwin L Drake, using a steam engine to power a drill through 70 feel of shale and bedrock, struck oil in Titusville, Pennsylvania.

The new oil industry provided work for unemployed whalers, and it saved whales from near-certain extinction.

CHANGING PEOPLE'S BEHAVIOUR IS HARD WORK/SEAT BELTS

For instance the introduction of seat belts in cars.

These were initially thought of by Robert McNamara, who worked for The Ford Motor Company.

Congress began setting federal safety standards in the mid-1960s, but even 15 years later seat belt usage was laughably low - just 11%.

Over time the numbers crept up, thanks to a variety of nudges.

1) The threat of a traffic ticket

2) Expensive public awareness campaigns.

3) Annoying beeps and dashboard lights if the belt wasn't buckled.

4) And eventually, a societal acceptance that wearing a seat belt wasn't an insult to anyone's driving ability.

Seat belt usage in 1985 - 21%
Seat belt usage in 1990 - 61%
Seat belt usage in 2009 - Over 80%

In fact seat belts reduce the risk of death in traffic accident by as much as 70%, and at about $25 each, are one of the most cost-effective life saving devices ever invented.

COWS, SHEEP AND METHANE

Ruminants - cud-chewing animals - are wicked polluters. They do this via exhalation, flatulence, belching and their manure.

Methane is 25 times more potent as a green house gas than carbon dioxide released by cars (or humans.)

The world's ruminants are responsible for about 50% more greenhouse gas than the entire transport sector.

Possible solutions:

* Shift away from eating red meat to eating chicken, fish, eggs, or a vegetable based diet. This does more to reduce greenhouse gases than eating locally-resourced food.

* Eat kangaroo meat - they produce much less methane. In fact Australian scientists are trying to replicate the digestive bacteria in kangaroos' stomachs so it can be transplanted to cows.....

GLOBAL WARMING HEROES

Al Gore is usually held up as a marvellous campaigner for global warming issues, but the authors of this book think a lot of his ideas are wrong. Instead they promote Nathan Myhrvold, and his Budyko's Blanket (A plan to put sulfer dioxide into the stratosphere), which they believe could reverse global warming.

http://greenmanblog.com/?p=251

GLOBAL WARMING AT THE POLES

Global warming is largely a polar phenomenon. High latitude areas are 4 times more sensitive to climate change than the equator.

*Economics is considered the most intellectually powerful of the social sciences, this is because it has a unified core theory from which nearly everything else follows. In fact economists often compare their field to physics.

*Losses of what we already have hurt us substantially more than new gains satisfy us. It gives us some pleasure to gain something, but it distresses us far more to lose something.

*Changes are the way that human beings experience life; eg if you move from your office to a meeting room and the temperature is the same - you won't give the issue of temperature a second thought. You will only notice if the meeting room is unusually hot or cold in relation to the rest of the building. When we have adapted to our environment we tend to ignore it. Instead we notice changes. They can be changes from the status quo, or changes from what was expected...but whatever form they take, it's changes that make us happy or miserable.

* We learn via frequent practice and immediate feedback. We are therefore much more likely to learn in relation to the trivia in our lives (eg what sort of type of bread we like), than in relation to the really big stuff (eg what sort of house to buy, or wife to choose.) Learning takes practice, and often we don't get practice with the big stuff.

*Human beings love a bargain. Shops that have tried to do away with coupons, or round up prices to a more realistic figure (eg $4.00 rather than $3.99), or do away with fake 'special offers', have often had to change back to these practices . The customers want the bargains, or at least an impression of bargains..... or sales plummet.

*The one alternative to the above are retailers like Walmart and Costco, where the retailers successfully operate under an everyday low pricing strategy. They have convinced customers that their entire shopping experience is an orgy of bargain hunting.

*Sunk costs

This is when an amount of money has been spent and the money cannot be retrieved. eg Joyce bought three dresses for her six year old daughter Cindy to wear to school, but Cindy decided she wouldn't go to school if forced to wear dresses. In this instance Joyce has to let go of the money she spent on the dresses, but she finds it very difficult to do this. We all do. Phrases like "Don't cry over spilt milk" or "Cut your losses and move on" are another way of taking advice to ignore sunk costs. Many believe that the US continued its futile war in Vietnam because they had invested too much to quit.

*Lotteries are a very good way of getting people to take part in something. eg if you want people to take part in a survey offer the prize of a nice bottle of wine or whatever.

*People hate it when a company appears to be acting greedily. eg Uber practices "surge pricing", whereby prices fluctuate depending upon levels of demand. Sometimes there is a big difference between low and peak demand, as much as ten times the regular price. There have been a lot of complaints from clients about this practice.

*Experimental games have also shown that people put much more money into a game if they are able to punish freeloaders. We are quite obsessed with fairness, in all aspects of life.

*We like keeping the status quo. We often find change difficult.

* Collaboration....
Although there are a handful of psychologists who have formed successful collaborations with economists over the years, behavioural economics has turned out to be primarily a field in which economists read the work of psychologists and then go about the business doing research independently. In neuroscience there is slightly more collaboration. Not all interdisciplinary meetings are a waste of time, but in the author's experience they have been disappointing.

*Managers are often risk averse. This is because in most companies, creating a large gain for the company will lead to modest rewards...while creating an equal-sized loss will get you fired. Companies need to create environments that are more benign, so that managers will feel more comfortable taking risks.

1) Someone to find out more about - Bill Phillips, an amazing engineer, sociologist and economist, mostly self-taught. He not only lived a fascinating life, but invented an incredible computer model of a country's economy - an hydraulic (yes, hydraulic!) representation, known as MONIAC, or the Monetary National Income Analogue Computer - and later as the Phillips Machine.

2) Being unemployed is one of the most unpleasant experiences that can happen to anyone.
And if you are unemployed for 6 months or more, it becomes much more difficult to get a job, even if you have the appropriate training and experience.

3) Side effects of a recession:

Nepotism, racism and other forms of intolerance rise, and with them, anti-democratic forces.

4) A simple, common-sense view of the economy is attractive but dangerous. In macroeconomics, whenever you point at some obvious change occurring right before your eyes, there is almost always something changing behind your back - the two phenomena connected by invisible strings and pulleys.

KEYNESIAN ECONOMICS

5) Inflation and wages:
If you get a straight wage cut you are liable to be furious. But if your salary increases by 3% when inflation is 6%, this is also a wage cut - yet it doesn't seem like one. This is a money illusion. (Nominal salaries and prices = effects of inflation etc are not taken into account. Real salaries and prices = effects of inflation etc are taken into account.)

6) Recession and wages:
Ideally wages should be decreased in order to handle the effects of a recession, but in reality this is usually too difficult to put into practice, so workers are made redundant instead, and the remaining workers are kept on at their original wage level.

6) Printing money, via a central bank like the Federal Reserve or Bank of England can help in a recession. This is monetary policy. But this has to be done in limited way or you can end up with crazy inflation.

7) Sticky prices:
Prices in an ordinary economy "stick" and this creates problems. If prices adjusted in complete freedom to competitive forces, then the actual amount of money in an economy would not matter eg as an extreme example people could just offer to do double the amount of work for half the price, when there was a recession. Instead, the prices "stick" and we get into problems. This can be helped by banks printing more money.

Other reasons prices stick:

A) Illogical prices
People can't always charge logical prices for their goods - society would often deem these logical prices unfair. eg the latest iPhone should logically be $100 more expensive for the initial batch, before more are able to be produced. But people would deem this unfair. They prefer to queue all night outside an Apple store for the privilege of buying the new phone.

Another example is that when a hardware stores raised the cost of its snow shovels from $30 to $40 after a heavy snowstorm because 'demand' had increased - people were furious.

B) Menu costs
Coca-Cola stayed the same price for 70 years because it was sold via a vending machine for 5 cents (ie a nickel coin)! (During the same time the price of coffee rose eightfold.)

C) Fixed price contracts, or advertised prices that people don't forget.

D) The cost of changing prices. (It can cost up to 20% of profits to change prices.)

E) Competition between firms selling the same products, to be as cheap as possible.

F) Inflation.

G) Minimum wage laws.

H) Regulated prices.

I) Public sector pay. It can become a political football.

*8) The spectacle of Drummond and Canty burning one million pounds

People were outraged - but they only destroyed their own buying power, they didn't destroy £1 million worth of society's resources. (I don't understand this....)

9) The loss of the gold standard.

The author thinks this is a good thing. Money doesn't have to be intrinsically valuable, all that is necessary for money to have value is for everyone to believe it has value.

The value of gold fluctuates. Sometimes it is a good investment, sometimes it is a bad investment, therefore it doesn't make good money.

The author also discusses Bitcoin. It was developed in 2008 by a mysterious person or group of people with the pseudonym Satoshi Nakamoto. They developed a way by which Bitcoin could be produced, or mined, slowly, like gold. Some people love Bitcoin for the same reason people love gold. It is independent from any government and there's a hard limit on how many Bitcoins can ever exist. But just like gold, Bitcoin is not money for a very simple reason. It's far too volatile. On 10 April 13 for instance, the price of Bitcoins dropped by 61%. Bitcoins may prove to be a good long-term investment, but they aren't money.

If central banks are not tied to the gold standard, they can print money when it is needed - during recessions.

Countries with high inflation and strong economic growth: India and China. Lower inflation than they are experiencing might have been preferable, but high inflation has been manageable.

10) Hyperinflation.

Excessive inflation. Experienced by Germany, Brazil, Yugoslavia and Hungary....and more recently, by Zimbabwe.

11) Deflation.

This is much worse than inflation, and it's where prices fall, year after year, along with your wages. But your mortgage remains the same - taking up a larger and larger proportion of your salary. On the other hand savers benefit.

But during a recession what you want is people spending money, to stimulate economic activity....and borrowers are much more likely to spend money than savers.

Today most central banks want a bit of inflation - about 2% The author thinks that 4% would be better. It gives central banks more leeway in lowering interest rates.

12) Another way of stimulating the economy in a recession. The Spending Multiplier.

The government employs people for special projects eg building a railway link or roads. To pay for this they either raise taxes or borrow money. Usually they borrow money (which amounts to higher taxes in the future.) This is assessed in the following way.....The Spending Multiplier

eg

The government spends £1 million
The economy grows by £1 million
Multiplier = 1

The government spends £1 million
The economy grows by zero
Multiplier = 0

The government spends £1 million
The economy grows by £5,000
Multiplier = 0.5

eg when Barack Obama's Council of Economic Advisors estimated the effect of the 2009 stimulus bill, they were working with multipliers as high as 1.6. In other words they estimated that for every million dollars the government borrowed and spent, the US economy would grow by $1.6 million dollars.

Three points re spending multipliers....

a) They must only be initiated in a slump.

b) The government must try and organise things so that they money circulates through its own economy rather than going abroad.

c) The government must try and avoid civil servants and unions getting too involved with its project, so it can stop the project when it wants to.

13) Tax Cuts.

Another way of growing the economy.

And if if a government cuts sales tax or VAT, rather than income tax, then that will have a more direct effect on encouraging spending.

14) Different methods of tackling a recession.
Since the 2009 crisis some countries have tried to grow their economies by tightening their belts. Others have governments which have borrowed and then spent money (like offering tax rebates on certain schemes.) Spending money works particularly well in countries with large domestic market, like the USA. There it is less likely that the government money will end up being lost via imports from other countries.

15) Cutting Interest rates:

this is your first line of defence in a crisis or recession. It is monetary police. It is simple, quick and easy to reverse if the economy recovers and inflation begins to rise.
It is also more likely to be under the supervision of independent, central banks, who are less influenced by short-term political expediency.

It works best with recessions that are short and shallow.

It works particularly well if interest rates are well above zero.

*It also helps if the economy is small and open with a flexible exchange rate (I don't understand this.)


CLASSICAL ECONOMICS

16) Classical economists say we shouldn't try and tinker with the economy. Rather we should just step back and let the economy fix itself. It will do its own adjusting.

Classical economists follow Says Law, which says it is simply impossible for an economy to suffer a glut in demand, instead prices adjust until supply equals demand.

The author feels that it depends upon the nature of the problem, on which view (Keynesian or classical) one should adopt.

GENERAL ECONOMICS

17) Politics
The author feels that when the economy is doing well, it is good to have a conservative approach.
Trim spending
Pay off debt
Reduce unnecessary regulations.

But when the economy is doing badly, then a much more left-wing approach is needed.
Keep spending
Run up debt
Launch big infrastructure projects.

18) The Eurozone.
One of the central ideas behind the creation of the Eurozone - and certainly the reason why so may weaker economies wanted to join it - was that it allowed every country in Europe to acquire the unassailable credibility of the Bundesbank, (which has a lot of influence on the Central European Bank.) As a result, peripheral economies would gain ready access to cheap money for borrowing. The lenders believed that now these countries had tied themselves to the Euro they would be unable to devalue their debts. But countries - particularly Greece - rang up unsustainable debts anyway. When the banking crisis hit in 2008 they found themselves in real trouble. And the European Central Bank, like the Bundesbank, is very against any type of inflation re the euro. The price of 'credibility' can be a severe lack of flexibility when something goes wrong.

19) Do we have to keep growing the economy?

The author feels that this isn't a problem. Growing the economy is okay, and a zero-growth economy would be all right too - although it would require some changes in approach.

20) Zero-growth economy:

Each generation would be no richer than the generation before it.

Governments wouldn't be able to base the funding of their pension and health care benefit systems on the hope that each generation would be larger and richer than the previous one (& could therefore comfortably pick up the bill.)

Nor could they reasonably run small deficits in the knowledge that the debt burden would stay stable as a portion of GDP. Governments might even find it sensible to pay off all their debts gradually - even accumulate assets, as a few resource-rich countries already do.

In the long run, in a low or zero-growth economic system, everyone from individuals to governments would have to be more careful about debts than they have been in recent years.

21) Poverty and inequality.

These are not often addressed in macroeconomics. They are tricky things to measure across countries and time.

You can get inequality between countries and within countries. The first often leads to people trying to migrate to wealthier countries, the second can lead to social corrosion.

The Gini Coefficient is a measure of inequality:

A gini of 100% would be a single person making all the money in the country.

The gini of various countries...

China 61%
Brazil 52%
US 45%
UK 34%
France 33%
Finland 27%

America and inequality:
After decades of falling, inequality has been rising now for 25 years, especially with the richest 1%, or even the top 0.1%

Average incomes have not grown much. If you look at the average income growth of the poorest 99% (ie families up to those who make $370,000 pa), their growth in average income is just 5.8% over the course of 18 years, which is very low.

The salaries of the most highly paid are now so high that it is no longer a question of symbolism - they are having a real impact on the shape of the economy.

Countries where the richest have got richer...

USA
UK
Canada
(& to a lesser extent New Zealand and Australia.)

Countries where this has not happened, and inequality has been stable...

France
Germany
The Netherlands
Switzerland
Japan.

Why is this?

The author feels that the in the counties where inequality has increased, there is now a very mediocre education in schools, with pupils doing badly in maths and the sciences. So they leave school not prepared to do well in the job market.

These same countries have very good and very elite universities - so a small proportion of the population do extremely well.

22) The future of macroeconomics.

* We must not expect macroeconomists for foretell the future, about shares or anything else. Forecasts of complex systems are much too difficult. They are rather there to help us keep the economy working well, and to help us when it malfunctions.

* They need to widen the scope of their discipline. They used to be mathematicians, historians, statesmen and philosophers - and they need to embrace these areas again.

* There are some big things removed from macroeconomics which also ought to be there.

A) Banking

But the intellectual project of understanding the interaction between banking and the economy is a difficult one.

B) Behavioural economics

A fusion of economics and psychology. Has made big inreoads in economic thought in the last 15 years.

Major figures in behavioural economics.
Daniel Kahneman
George Akerlof
Robert Shiller (and expert on financial bubbles)
Matthew Rabin
Richard Thaler (author of 'Nudge')

C) Complexity theory.

Helps with the dynamics of systems.

In the old days, when someone borrowed money from a bank and bought a house, the lending bank used to own the resulting financial product (mortgage) and that was that. However, financial innovations created mortgage-backed securities (MBSs), which bundle together up to several thousand mortgages. In turn, these MBSs, sometimes as many as 150 of them, were packed into a collateralized debt obligation (CDO). Then CDOs-squared were created by using other CDOs as collateral. And then CDOs-cubed were created by combining CDOs and CDOs-squared. Even higher-powered CDOs were created. Credit default swaps (CDSs) were created to protect you from default on the CDOs. And there are many more financial derivatives that make up the alphabet soup that is modern finance.

By now even I am getting confused (and, as it turns out, so were the people dealing with them), but the point is that the same underlying assets (that is, the houses that were in the original mortgages) and economic activities (the income-earning activities of those mortgage-holders) were being used again and again to 'derive' new assets.

* There is really no such thing as a free market. Governments already intervene in the market. Those who argue against government regulations already rely heavily on the hand of government in orchestrating their affairs. The reality is that large and active governments can promote rather than dampen economic dynamism. Widespread distrust of government is unwarranted.

* We don't live in a post industrial economy. Even those organisations which concentrate on research and development, and cutting edge innovations, need an industrial base upon which to base their research. They need that bedrock. We lose industry at our peril.

*Trickle-down wealth doesn't work. Just because the rich get richer, it doesn't mean that the poor get richer too.

* The free market economy is responsible for all sorts of society ills:

- the 2008 financial crisis
- stagnating wages for ordinary workers
- longer working hours
- horrendously inflated salaries for the managers of big companies
- greater job insecurity
- shorter term contracts
- an ever-increasing pressure on suppliers to provide cheap products.
- Inequality in societies.
- the encouragement of borrowing at unprecedented rates
- the huge ballooning of the financial investment sector, and it's dangerously unregulated behaviours, which threaten the rest of the economy.

* Wages in rich countries are determined more by immigration control than anything else. "What is a starvation wage in the US is a handsome wage in China, and is a fortune in India".
Chang feels that immigration controls are necessary though, for a variety of reasons.

* Western countries stop developing countries from realising their potential by foisting free market regulations upon them, when they are at a stage of needing different, perhaps more protectionist policies. When Britain and America were developing there were all sorts of rules in place to protect their emerging industries. eg there was no such thing as a free market economy during Britain's industrial revolution....so why should we foist this free-for-all upon emerging economies today? Why should they have to try and develop differently from the way that we did?

* Shareholders have in many instance been given far too much power in the companies they invest in. Company managers, more and more, focus on trying to keep them happy, often to the detriment of the long term interests of the company. And why should the shareholders care? They can just sell their shares and move on to the next company. Often there is a chummy relationship between company managers and the shareholders. The former do everything they can to cream off instant profits, in the process awarding themselves huge bonuses. The shareholders, happy with the instant profits, let the company managers award themselves these huge bonuses. It can be a rotten system. Not all countries have taken this lackadaisical approach. In some countries there are regulations ensuring that shareholders can only have a limited powers in the companies they invest in, and that other share-holding bodies (the government, or banks, or founding families of companies), ensure that company managers put the long-term well-being of the company first.

*It is much easier for entrepreneurs to become successful in wealthy countries, because we have things like good infrastructures, better technologies, better institutions and better organised firms. We make things much easier for entrepreneurs to succeed. In developing countries they have things like power cuts that mess up productions schedules, or Customs won't clear spare parts needed to fix machinery, or payments are delayed due to problems getting a permit to buy US dollars. Delivery trucks break down and deliveries are delayed, due to potholes on the roads. petty officials bend or even invent rules in order to extract bribes.

*We over-estimate the important of new technology and under-estimate the importance of older technology. Household appliances, electricity, piped water and gas have done much more to revolutionise our lives than the internet. This has given us the dangerous notion that we can live on an ideas culture, rather than one based on manufacturing. De-industrialization also has an effect on a country's balance of payments - because services are inherently more difficult to export than manufactured goods. (However some services are tradeable - eg banking, consulting and engineering.)

*For many years inflation was the big scary word. And to a great extent, since 1990, we have conquered inflation all over the world, due to much tougher attitudes towards government budget deficits, and the introduction of more and more politically independent central banks, that are free to focus single-mindedly on inflation control. BUT....even though inflation has been tamed, the world economy has become much more shaky. Chang believe that there is no actual evidence that at low levels inflation is bad for an economy. He believes that inflation at 8-10%, or even up to 20% or 40%, can be compatible with a country have a good growth rate, with a fast-growing economy. He believes that too much inflation control can result in reduced investment, and that our obsession with it has affected long term stability, economic growth and human happiness.

*Most transnational corporation are in fact largely based in their mother countries. They are national companies, with international operations. They conduct their core activities such as high-end research and strategizing at home, and most of their top decision-makers are home-country nationals. They are loyal to their own governments. Talk of a borderless world is highly exaggerated.

*Private equity funds do not make good investors. Often they buy companies, reduce the company costs as much as possible (much to the detriment of the working conditions for people working in these companies, and often to the detriment of a company's long-term well-being and prospects), and then just sell the companies on, 3 - 4 years later. At worst, they just asset strip.

* The managerial classes have gained enormous influence over the political sphere. This includes supposedly left of centre parties such as Britain's New Labour and America's Democratic Party. Especially in the US, many private sector CEOs end up running government departments. Most importantly, they have used their political and economic influence to spread the free-market ideology that says whatever exists must be there because it is the most efficient.

*'Purchasing power parity' and the 'international dollar' = a way of measuring a country's living standard. But these can be misleading. One also needs to factor in levels of crime, or health standards - life expectancy and infant mortality. The USA has a high 'purchasing power parity' - but this is because it's service workers are poorly paid, have weak welfare supports and much less job security than their European counterparts.

*Africa is not destined for under-development. When newly independent, most developing countries had a decent growth performance, not fantastic, but good enough. It was only when made to join the free market in the 1980s that things went seriously wrong. They were forced back into relying on exports of primary commodities, such as cocoa, coffee and copper. African countries have continued to suffer from the wild price fluctuations and stagnant production technologies that characterize such commodities. Often they were asked to export too much - leading to a collapse in prices. So they were exporting more but earning less. Africa does have some serious problems, but they have problems that many Western countries also had when they were developing, and hopefully African countries can work through them too.

*Microfinance in developing countries does not work

Often these loans are given with high interest rates, and few businesses can make the necessary profits to repay these loans.
- The people who take out the loans often have limited skills.
- They only have a narrow range of technologies available to them.
- They can only get hold of a limited amount of finance via microfinancing schemes.
- If people have a good idea - other people often quickly copy it, and the market becomes too full.

*We need to bring regulations to the free market.
The world is too complex for our limited intelligence. The problem isn't a lack of information but our inability to process it. The economy involves millions of people and billions of products. Companies cope by operating with "productive routines" which simplify their options and search paths. Societies do the same. They create informal rules that deliberately restrict people's freedom of choice (eg queueing means we don't constantly have to calculate and re-calculate our positions at a crowded bus stop.) The financial crises of 2008 was due to the free-for-all complexity of the market - even financial experts did not fully understand the financial instruments being used and offered. The top decision-makers of financial firms certainly didn't grasp much of what their firms were doing, and the regulatory authorities couldn't fully figure out what was going on. If we are to avoid similar financial crises, we need to severely restrict freedom of action in the financial market.

*More education is not in itself going to make a country richer. Switzerland, one of the most technologically advanced and successful countries in the world, only has a 47% enrolment level at university (compared to 96% in Korea, or 82% in the USA.) University courses often don't prepare people for the job market, other than illustrating to employers that people have the tenacity to stick out doing a degree. And the more people who have degrees, the more people feel they have to do a masters or PhD to illustrate their levels of intelligence. It all gets ridiculously inflated.

*Equality of opportunity needs to be extended. It is not enough to offer free schooling, we need to make sure that all children coming to school have enough to eat as well. This is best done by ensuring an equality of basic income. This also applies to adults, eg when they lose their jobs they need unemployment benefits, and help with re-training.

*The stronger the welfare state, the higher the social mobility. In the US, low overall mobility is largely account for by low mobility at the bottom of society. This suggests that it is the lack of a basic income guarantee that is preventing poor kids from making use of the equality of opportunity provided by schooling.

*A good safety-net, in terms of a robust welfare state, gives people more incentive to be mobile and flexible, because it won't be the end of the world if they lose their jobs. They can afford to take risks. This is one reason why there is more trade protectionism in the US....Americans know that losing their jobs may involve a huge fall in their current living standards, they may well lose their health insurance and perhaps their homes. It may even be the end of their productive lives. The economies of Scandinavian countries, with high welfare support, have performed just as well as the US.


*Financial markets are HUGE, and they need to become less, rather than more efficient. They have become very good at generating short-term profits for themselves. However, as seen in the 2008 global crisis, they have made the financial system itself, as well as the overall economy, much more unstable. Also, given the liquidity of their assets, they are too quick to respond to change. This makes it difficult for real-sector companies to secure the 'patient capital' that they need for long-term development. The speed gap between the financial sector and the real sector needs to be reduced. The financial markets need to be deliberately made less efficient.

Deregulation of financial markets has had appalling effects - as can be seen with the total meltdown of the Iceland banking system in 2008. Before that, everything was (seemingly) going fantastically well. In 2007 it was the 5th richest country in the world. But then everything went bang in 2008....and this was all due to privatization and de-regulation of Iceland banks, which set them on a roller-coaster of borrowing and investment.

The financial sector has become hugely more powerful in many countries, following financial deregulation in the 1980s.

In the UK and France, the profit rate of the non-financial sector was higher than the profit rate of the financial sector..... but after deregulation, the profit rate of the financial sector was higher than the non-financial sector.

In the US, the financial sector became so attractive to people that even many manufacturing companies have turned themselves essentially into finance companies.
eg General Electricity, General Motors and Ford - once all symbols of American manufacturing prowess, now make most of their money through their financial activities.

Things that could help slow down financial markets...
Taxes on transactions
Restrictions on cross-border movement of capital (especially movements in and out of developing countries)
Greater restrictions on mergers and acquisitions.

The role of prime ministers Margaret Thatcher, John Major, Tony Blair and Gordon Brown in British finance. Their attitudes towards the super rich.

Funding for British elections. Transparency and hiding of funds.

Inequality between the uber wealthy and ordinary working people.

Company take-overs

The drive towards individual (rather than company) wealth.

Wealthy people as global citizens, rather than being tied to any country.

Tax avoidance.

Off-shore money.

Britain as a giant tax haven for the wealthy

The financial crisis of 2007

Sub-Prime Mortgage scandal. Loans for Lies.

The Northern Rock Bank

How the wealthy make their money by being in debt.

The buying and selling of debt.

The chopping and swapping of debt packages eg collateralized debt obligations.

Private Equity Firms

Hedge Funds

Pension Funds

Investment Banking

Asset-stripping versus streamlining a business

British venture-capital industry versus American venture-capital industry

Globalization

Derivative Financial Markets

The invention of new Financial products

Short-term selling

The City of London - who owns it and who runs it.

Activities of various financial superstars and/or cowboys....

Philip Green
Ronnie Cohen
Tom Hunter
Jon Wood
Michael Levy
Allen Leighton

And the world's arch money-maker.....the investment bank Goldman Sachs

Look at what we have ended up with - zero hour contracts, people registered as self-employed just to massage employment figures, when their ability to support themselves is often deeply inadequate, exorbitant rents being charged by the private sector, severely curtailed rights for trades unions, increasing privatization of the NHS, often with disastrous results, very low corporation taxes, enthusiastic chasing of people who commit benefit fraud (and there are very few of them), and virtually no chasing of companies who practise tax evasion, banks that have had to be rescued from bankruptcy by tax-payers - yet who have staff who pay themselves preposterously high salaries and bonuses. University students who end up leaving college with an average debt of £53,000.

He also discusses issues relating to things like Britain's involvement with the EU, our relationship with America, the policies of UKIP, the cosy relationships between politicians, journalists and big business, concerns about the police, the fall in pay in the average wage packet and the bad track record of various government schemes for people who are out of work. Debt - private debt versus public debt, and the degree which we are struggling with private debt, (of which the debt of financial institutions makes up a huge proportion.) He also discusses the degree to which the state funds big business interests. The last was of particular interest.

* Educating the workforce
* Providing infrastructure like roads and airports
* Subsidizing research and development
* Subsidizing apprenticeships (every year this costs the government about £1.4 billion)
* Subsidizing low wages (4.8 million people receive tax credits to "top up" their take home pay.)
* The benefits to shareholders and entrepreneurs of things like limited liability law, or the bankruptcy law.
* Propping up privatized industries like the rail networks, with subsidies. (Between 2007 and 2011 alone, the UK's largest five rail companies received nearly £3 billion in state. subsidies.)
* £24 billion spent on Housing Benefit. This is largely a subsidy for low wages. According to a study by the Building and Social Housing Foundation in 2012 over nine out of ten new housing benefit claims in the first two years of our current coalition government went not to the unemployed, but to working households.
*Quantitative easing by the Bank of England - the Bank estimate that the poorest tenth of Britain's population each lost £779 because of QE, whilst the richest 10% enjoyed a £322,000 jump in the value of their assets.

Although many factors are involved, one in particularly stands out - the rapid acceleration of technological changes that increase the leverage of the most able individuals.

Markets are now world-wide, not just country-wide. The are also phenomenally competitive. Executive decisions have become much more important to the bottom line.

They are amongst the highest paid chief executives in the US. For example, Altria, the parent company of the Philip Morris cigarette companies, paid its chief executive $18.13 million in 2005 (basically, they are paid a lot of money so they don't mind talking rot.)

The unemployment rate in the US is consistently lower than that of most European countries. In September 2006 it was 4.6% in the US but 8.7% in Germany.

This is because people in America who are not working have a much tougher life than those in Germany who are not working. Americans without jobs have difficulty making ends meet. By contrast, the unemployed in Germany can qualify for government support that will satisfy their basic needs indefinitely.

(I feel this is worded in a prejudiced way...I think it is far better that people are supported than thumped down on the hard rock of poverty. Added to which, unemployment benefits are far from being wonderful in European countries. Not a good basis for a life of leisure and pleasure, which I feel is slightly insinuated here...)

"In 2005 Americans paid an average of 22 cents a pound for raw sugar, while the average price on the world market was only 10 cents. This is because the US imposes a tariff of more than 100% on imported sugar. But that raises the question why legislators in the US Congress would enact policies that cost their constituents some $2 billion each year. It's because these policies benefit the sugar producers. For example, the sugar tariff was estimated to increase the annual profits of one large producer in Florida by some $65 million. With that much at stake, producers not only write letters but also hire skilled lobbyists to argue their case. More importantly, they make substantial campaign contributions to legislators who support the sugar tariff."

Another relevant factor is that because the typical family spends on a small fraction of its income on sugar, few voters would take the trouble to complain.

Fuel is so much more expensive in Europe than in America. In recent years the average price of a litre of petrol, including all taxes, has been almost twice as high in Europe as in the US. (It makes me proud to be British!)

"Japanese couples commonly celebrate their weddings with an extended network of colleagues, employers and other members of the community...... Guest lists frequently total from three hundred to five hundred people, even at weddings of middle-income couples.

Japanese couples cast such a broad net in part because the society relies heavily on informal social and business networks. ....Failing to invite someone to a wedding who might have expected to be invited risks a social rupture that jeopardises one's standing. Expansive Japanese wedding guest lists may thus be seen as an investment in maintaining important social and business networks."

Factors affected by a country’s level of financial equality

Levels of trust between people
Homicide
Violence
Imprisonment
Child welfare
Infant mortality
Drug and alcohol usage
Life expectancy
Mental illness
Obesity
Levels of education
Maths and literacy scores
Teenage births
Social mobility
Ecological footprint


The Trickle Down Effect

The more the richest people in society spend on conspicuous consumption the more ordinary people will be driven to spend in an effort to keep up.

“While inequality has been rising in the US and Britain, there has been a long term decline in savings and a rise in debt. In 1998 four times as many people filed for bankruptcy than did in the 1980s….. By 2002, unpaid credit card debt was $9,000 for the average card-holder….. The growth of inequality made it harder for people to maintain standards.

The increased pressure to consume led people to save less and borrow more, and this happened to such an extent that the growth of consumer demand became one of the main drivers of the long economic boom and financial speculation which ended in crisis (in 2008)….”


Working Hours

A study of OECD countries by Sam Bowles, professor emeritus of economics at the University of Massachusetts shows that unequal countries have longer working hours. People in unequal countries do the equivalent of two or three months extra work a year.

Recycling waste is done better in societies with high equality

Japan and Sweden (best)
Germany and Switzerland
France
Italy
Australia
Portugal
USA and Spain
UK (worst)

Big bucks for the big guys in unequal countries

“In 2007 chief executives of 365 of the largest US companies received well over 500 times the average pay of their average employee, and these difference were getting bigger… Among the Fortune 500 companies the pay gap in 2007 was close to ten times as big as it was in 1980, when the long rise in income inequality was just beginning.”

Who owns what

The 5 richest people in the UK have more in money and assets than the bottom 20% of the population.
In America, the richest 20% of the population control 84% of the wealth.

Homicides are worse in unequal countries

”For murder rates to rise in particular places…people have to be made to feel more worthless. Then there are more fights, more brawls, more scuffles, more bottles and knives and more young men die”
Danny Dorling, health geographer.

There are higher levels of imprisonment in unequal countries

This is usually due to longer prison sentences, rather than higher levels of crime. In the UK in 1990 there were 46,000 people in prison, by 2007 that figure had almost doubled, and there were 80,000 in prison.

Laws which generate longer prison sentences:
Three-strikes laws
Minimum mandatory sentences
“Truth-in-sentencing” (i.e., no remission).

Longer prison sentencing can reach ludicrous extremes….in 2004 in California there were 360 people serving life sentences for shoplifting.

Several prisons in America have very harsh environments, and have been criticised by organisations like Amnesty International and the Human Rights Watch. Prisons in places like Japan and the Netherlands are much more benevolent.

“You’d think countries with lower prison population per head of population would have higher rates of re-offending (i.e., they must only be imprisoning the worst criminals), but this is not the case. Instead there seems to be a higher rate of re-offending in more punitive systems e.g.

UK and USA –Re-offending rates of 60-65%
Sweden and Japan – Re-offending rates of 35-40%"


Social Mobility and equal opportunity

This is much better in countries that are equal. America and the UK again come bottom of pile when it comes equal opportunity.

“Americans, when you want to live the American dream, go to Denmark.”

Education

Countries near the top of the equality table spend the most money on public education, e.g., in Norway , almost all ( 97.8%) of its spending on school education is public expenditure. In contrast, in America, only 68.2% of the spending on school education is public expediture.

Index of Health and Social problems

These are much better in more equal countries.

Japan (Best)
Sweden
Norway
Denmark
Finland
Belgium
The Netherlands
Switzerland
Spain
Canada
Germany
Italy
France
Austria
Ireland
New Zealand
Greece
UK
Portugal
USA. (Worst)

Why did the book concentrate on rich countries?

The authors couldn't find the data needed for poorer countries.

Factors affected by a country’s level of financial equality

Levels of trust between people
Homicide
Violence
Imprisonment
Child welfare
Infant mortality
Drug and alcohol usage
Life expectancy
Mental illness
Obesity
Levels of education
Maths and literacy scores
Teenage births
Social mobility
Ecological footprint


The Trickle Down Effect

The more the richest people in society spend on conspicuous consumption the more ordinary people will be driven to spend in an effort to keep up.

“While inequality has been rising in the US and Britain, there has been a long term decline in savings and a rise in debt. In 1998 four times as many people filed for bankruptcy than did in the 1980s….. By 2002, unpaid credit card debt was $9,000 for the average card-holder….. The growth of inequality made it harder for people to maintain standards.

The increased pressure to consume led people to save less and borrow more, and this happened to such an extent that the growth of consumer demand became one of the main drivers of the long economic boom and financial speculation which ended in crisis (in 2008)….”


Working Hours

A study of OECD countries by Sam Bowles, professor emeritus of economics at the University of Massachusetts shows that unequal countries have longer working hours. People in unequal countries do the equivalent of two or three months extra work a year.

Recycling waste is done better in societies with high equality

Japan and Sweden (best)
Germany and Switzerland
France
Italy
Australia
Portugal
USA and Spain
UK (worst)

Big bucks for the big guys in unequal countries

“In 2007 chief executives of 365 of the largest US companies received well over 500 times the average pay of their average employee, and these difference were getting bigger… Among the Fortune 500 companies the pay gap in 2007 was close to ten times as big as it was in 1980, when the long rise in income inequality was just beginning.”

Who owns what

The 5 richest people in the UK have more in money and assets than the bottom 20% of the population.
In America, the richest 20% of the population control 84% of the wealth.

Homicides are worse in unequal countries

”For murder rates to rise in particular places…people have to be made to feel more worthless. Then there are more fights, more brawls, more scuffles, more bottles and knives and more young men die”
Danny Dorling, health geographer.

There are higher levels of imprisonment in unequal countries

This is usually due to longer prison sentences, rather than higher levels of crime. In the UK in 1990 there were 46,000 people in prison, by 2007 that figure had almost doubled, and there were 80,000 in prison.

Laws which generate longer prison sentences:
Three-strikes laws
Minimum mandatory sentences
“Truth-in-sentencing” (i.e., no remission).

Longer prison sentencing can reach ludicrous extremes….in 2004 in California there were 360 people serving life sentences for shoplifting.

Several prisons in America have very harsh environments, and have been criticised by organisations like Amnesty International and the Human Rights Watch. Prisons in places like Japan and the Netherlands are much more benevolent.

“You’d think countries with lower prison population per head of population would have higher rates of re-offending (i.e., they must only be imprisoning the worst criminals), but this is not the case. Instead there seems to be a higher rate of re-offending in more punitive systems e.g.

UK and USA –Re-offending rates of 60-65%
Sweden and Japan – Re-offending rates of 35-40%"


Social Mobility and equal opportunity

This is much better in countries that are equal. America and the UK again come bottom of pile when it comes equal opportunity.

“Americans, when you want to live the American dream, go to Denmark.”

Education

Countries near the top of the equality table spend the most money on public education, e.g., in Norway , almost all ( 97.8%) of its spending on school education is public expenditure. In contrast, in America, only 68.2% of the spending on school education is public expediture.

Index of Health and Social problems

These are much better in more equal countries.

Japan (Best)
Sweden
Norway
Denmark
Finland
Belgium
The Netherlands
Switzerland
Spain
Canada
Germany
Italy
France
Austria
Ireland
New Zealand
Greece
UK
Portugal
USA. (Worst)

Why did the book concentrate on rich countries?

The authors couldn't find the data needed for poorer countries.
(hide spoiler)]

Everything is relative:

We don't know what we want, unless we see it in context. eg we don't know what sort of racing bike we want until we see a champion cyclist ratcheting gears on a particular model in the Tour de France. We don't even know what we want to do with our lives until we find a friend or relative who is doing what we think we should be doing.

Thinking

This is difficult, and often unpleasant. It is much easier just to follow our intuition (which can often be based on the silliest things.)

The Middle Option (Everything is relative...)

Given three options, we usually choose the middle one. eg if an electrical shop wants to sell a certain television set it will put it in the window with a more expensive and less expensive television set on either side. We will make comparisons....and go for the middle option.

Envy and one-upmanship

These are often big motivating forces in people's lives.

Take the example of escalating salaries and perks given to senior executives in US companies.

1976: The average CEO was paid 36 times as much as the average worker
1993: The average CEO was paid 131 times as much as the average worker

At this point the Federal securities regulators stepped in. In an effort to stop this ridiculous escalating of executives' salaries, they forced companies to reveal pay and perks given to their top executives. They thought this would deter the greed.

Instead, after the legislation about transparency was put into effect, CEOs were paid 369 times as much as the average worker! When CEOs saw how much other CEOs were being paid, they felt envious, and demanded equity - and their salaries and perks crept up and up!

How to combat the envy drive

Make a conscious decision to try and lead a basic/simple life. The alternative is 'The more you have the more you want,' Don't be a greedy CEO. Be sane.

Stay away from social circles where spending and one-upmanship are a part of how they do things.

When buying a house, or other major investments - just don't look at products outside your budget.

There is no merit in increasing the luxury in our lives. We just get used to more and more expensive things, and saving becomes more and more difficult.

Realise that the price of many products is arbitrary

Usually a product's price is affected by the initial price at which it was sold. This then become the accepted price for that product. (My example) If people go to an art gallery and pay £1.00 for a beautiful pebble they will think this is a fair price for future pebbles they buy. If people pay £10.00 for that first beautiful pebble - they will regard this as the norm.

We reinforce our own behaviour

If we like something once, we will do it again, and this builds up into a self-affirming belief of 'liking' something. Each time we do something we initially liked, we increase the degree we decide we like it. Sometimes we need to step back and see how much this is still true.
*How did this habit begin?
*How much pleasure will |I really be getting from it?
*Would I be better off spending the time/money elsewhere.

We get seduced by glamour and the appearance of sophistication

This is why Starbucks succeeded over Dunkin'Donuts.

We do what is expected of us

The author read some poetry to his students. He then asked half if they would pay $2.00 to hear them again. They agreed.

He asked the other half if they would listen to them again if he paid them $2.00. Again they agreed.

The lure of the free offer

The author argues that the attractiveness of two for the price of one (ie one free) is hugely more powerful than just offering a single product more cheaply.

He cites other examples as well. We love things that are free, and are inevitably seduced by offers of things for free.

This is why Coca Cola have a cola product called Zero. Zero calories. Zero = free. Free from calories! Free, free, free!

Market exchanges versus social exchanges

We live in two worlds, one governed by market exchanges, and the other governed by social exchanges.

Market exchanges are business...sharp-edged, prices, rates, interest, cost and benefits.

Social exchanges are friendly...warm and fuzzy.

People are happy to do things for free, eg give their time to charities, but you can't taint this by mixing in market exchanges with what is basically a social exchange.

eg lawyers were asked if they would help poor elderly clients for £30.00 an hour. They refused.
Then another group were asked to do the same thing again for free, and they all accepted.

eg A yoga master taught his students for free in his home town. One day they said they loved his classes and would be happy to make a financial contribution towards the class. He replied "If I charged you for this class you could not afford me." Again - they were transgressing the market exchange/social exchange divide.

A lot of businesses nowadays try and introduce the warmth of social exchanges into their work practices. They want the work environment to be more friendly and cosy. But when you have practices like zero hour contracts, or sending employees work-related emails outside working hours, a cloak of chummy friendliness wears a bit thin.

It's the same with relations between businesses. Friendliness is good for business. But then one business pays its bill late and gets charged an extra fee for delayed payment. This again puts a strain on the chumminess. Today many companies try and market themselves as social companions, but this makes it hard for them when they have to contravene social norms and become businesslike.

Don't make decisions when you are emotionally aroused

The author and his colleagues did computer experiments with students who were sexually aroused, and their decision-making abilities went haywire. The author feels that this is the same for other emotional states. eg It is not good to make decisions when you are angry, hungry, fearful or in pain. It is far better to walk away and calm down, and yes, don't send that email....

It is better to avoid provocative situations than to try and walk away from them

Rates of saving in different countries
America - people spend more than they earn

Europe - 20%

Japan - 25%

China 50%

Reasons for American rates of spending.

* Consumerism
* An explosion in consumer credit. The average American family has six credit cards.

Why have we got such little self control

Immediate gratification versus long term goals.

The best way to curtail our urge for immediate gratification....

*Set ourselves deadlines
*Start a blog discussing our efforts to keep to our goals.

We value what we own hugely more than other people value it

The author did an amazing test re basketball game tickets at Duke University, which has a small stadium.

Students had camped in a line to buy tickets for several days, for a special game. Not only did they camp, but they had to report regularly to the ticket office, or they were sent to the back of the queue.

Afterwards the author did a test...

The average price people who managed to get the tickets were prepared to sell them for...$2,400.

The average price those who didn't get tickets were prepared to buy them for $170.

(And no, that is not a typo)

Because we love what we possess, we over-value it. We also exaggerate to ourselves the sense of loss we would have if we lost one of our possessions.

We expect other people to value our possessions as much as we do - but they don't.


This is why 'trial' promotions are so successful. After people have something on trial for a couple of weeks they want to keep it. Emotionally it has become one of their possessions.

Ownership doesn't only apply to material things, it also applies to points of view

Once we take ownership of an idea we value it more than we should. Frequently we can't let go of it because we can't bear the thought of its loss. What are we left with? An ideology that is rigid and unyielding.

(Me - Re the above....I couldn't relate to this concept at all!)

Downgrading anything is experienced as a loss

eg moving to a smaller house.

The challenge of making choices

In today's world we have far too many options. It is important to try and prioritize - if necessary just choose any particular options, rather than having too much on our plate and finding life stressful as a result. We have to commit ourselves to just a few paths, interests, courses in our lives.

Human nature wants to keep all options open (the author has done copious experiments to prove this), but this is bad. We must simplify.

Another downside of following too many things in your life, is that the important things get overlooked, or don't get enough attention.

Placebos in medicine

Expensive aspirin and paracetamol is more effective than cheap aspirin and paracetamol.

Several operations have been proved to be pure placebos. Patients given fake operations have recovered just as well as those given genuine operations (needless to say this only applies to certain operations!)

The author conducted various experiments - eg giving gym goers a stimulant tonic which said it would "improve performance". When told it was more expensive, the gym goers performed better and said it was more effective. When told it was cheaper - the gym goers found it less effective.

The good news about our weakness for 'expensive' pills and tonics.... Once we are told that the cheaper options is exactly the same as the more expensive one - we get equal help from both products.

Dishonesty

Most of us are prone to being a little bit dishonest. The author cites several experiments to show this. But most of us have a cut off point re dishonesty. We might nick a pencil from work, or cheat a bit on expenses, but we wouldn't take money from a colleague's purse.

The author argues at some length in the book for the importance of honesty in creating a safe and trustworthy society. He talks about the dishonesty of major institutions, as well as individual dishonesty.

He talks about the fact that a lot of lawyers now complain that their profession has become unethical, and he feels that doctors, bankers and other professional are equally affected. He feels this can be blamed on a movement in the 1960s to deregulate the professions.

The author feel passionately that good ethics and honesty are an important and valuable asset to society, and they need to be encouraged and protected as much as possible.