I promote myself as having the mind of a finance director and the heart of a marketer to both emphasise my main skills (and a big factor of difference to my competitors) and also to stress the two main stakeholders each business must strive to meet:
- Delighting customers so they buy and buy again
- Making enough profit for the owner to keep him or her in the game and continually innovating to add customer and shareholder value.
These two forces can be portrayed as opposing each other (e.g. a customer gains with a low selling price, a business makes more money from a higher price) but I believe there’s an optimum position that meets both.
As I intend to look deeper at the next economic crisis, which I expect to make the 2008 to 2013 contraction look like a baby, I think it’s important you understand my views on economic theory and politics.
The Mind Of A Free Marketer
Intellectually I find the ideas of the free marketing economists that want little or no interference in the work of the free markets very appealing.
There’s a strong logic in the way Adam Smith’s invisible hand works to create the best outcome.
The Heart Of An Interventionist
However much I admire the logic of allowing the free market to work on it’s own, I accept that there are two big problems.
The first concerns externalities.
These are benefits or costs (but it is costs that cause the problem) that accrue to people and society who are third parties to the transaction. Provided the transaction is done with free will, both the seller and the buyer must believe (before purchase) that the benefit of the deal is worth more than the sacrifice so they expect to be in a better situation.
But other people are affected.
The venue, the band or DJ and the party-goers are happy with loud music blaring out until the small hours of the morning. The neighbours who are trying to get some sleep aren’t. The costs they bear are external to the transactions. (This may seem trivial but it’s a problem I suffer from as a morning person in suburbia.)
Bigger problems arise from environmental issues. Pollution may be contributing to climate change but, without intervention in the form of pollution charges, neither the supplier or the customer bears the costs. Society now and in the future does.
This takes me back to my days at university when I was studying economics and the liberal Pareto paradox.
Something is regarded as Pareto efficient if there is no way to improve one person’s position without harming someone else.
This is what Wikipedia has to say about the original paradox.
Amartya Sen’s original example
“Sen’s original example[1] used a simple society with only two people and only one social issue to consider. The two members of society are named “Lewd” and “Prude.” In this society there is a copy of a Lady Chatterly’s Lover and it must be given either to Lewd to read, to Prude to read, or disposed of unread. Suppose that Lewd enjoys this sort of reading and would prefer to read it himself rather than have it disposed of. However, he would get even more enjoyment out of Prude being forced to read it.
Prude thinks that the book is indecent and that it should be disposed of unread. However, if someone must read it Prude would prefer that he, himself read it rather than Lewd since Prude thinks it would be even worse for someone to read and enjoy the book rather than read it in disgust.
Given these preferences of the two individuals in the society, a social planner must decide what to do. Should the planner force Lewd to read the book, force Prude to read the book, or let it go unread? More particularly, the social planner must rank all three possible outcomes in terms of their social desirability. The social planner decides that she should be committed to individual rights, each individual should get to choose whether he, himself will read the book. Lewd should get to decide whether the outcome “Lewd reads” will be ranked higher than “No one reads,” and similarly Prude should get to decide whether the outcome “Prude reads” will be ranked higher than “No one reads.”
Following this strategy, the social planner declares that the outcome “Lewd reads” will be ranked higher than “No one reads” (because of Lewd’s preferences) and that “No one reads” will be ranked higher than “Prude reads” (because of Prude’s preferences). Consistency then requires that “Lewd reads” be ranked higher than “Prude reads,” and so the social planner gives the book to Lewd to read.
Notice that this outcome is regarded as worse than “Prude reads” by both Prude and Lewd, and the chosen outcome is therefore Pareto inferior to another available outcome — the one where Prude is forced to read the book.”
I still didn’t read the book so does this mean I’m neither a lewd or a prude?
Where free market actions clearly don’t create an outcome that is best for society, action needs to be considered.
Not necessarily taken.
It seems to me that unintended consequences often outweigh the intended consequences of things done by politicians.
Perhaps they do the wrong things, guided by self interest and short term sound-bites and results. Sometimes it looks good to be doing something, anything… even if the longer term results are destructive.
The second issue that free market economics can be cruel and harsh
The free market takes no prisoners.
People receive what they are worth based on supply and demand for the value they can create.
At the extreme, that means somebody seriously ill or badly disabled and who cannot contribute to creating economic wealth, receives nothing.
That’s unacceptable for a “civilised” society and anthropological studies show that even the most primitive look after the weak, young and elderly.
Then there are those who could work but don’t.
This might be because of one of two reasons:
- They can’t find a job that makes good use of their skills and capabilities.
- They are lazy and feckless believing that society owes them a living.
In the UK at the moment, with the pressure on the high costs of welfare programmes, the first group are excused but popular opinion suggests the second group should be penalised.
I find it hard to disagree.
My Politics
It’s just about impossible to separate politics from economics so let me be clear about where I stand.
In UK terms, I think of myself as a Tory wet. I’m on the left of the right wing party although I have problems with the European Union and predicted the problems with the crazy idea of a euro without political and fiscal unity.
In theory, perhaps David Cameron as prime minster should suit me well. He doesn’t because his views seem to zig when I zag and vice versa. Perhaps it’s because he’s posh (an old Etonian) and I’m not but I feel our values differ.
I believe that entrepreneurship is the finest example of capitalism and the best way for any economy to grow. Even before the credit crunch, I was queasy about the high rewards of financial engineering that captured rather than created wealth.
I believe much more in the equality of opportunities than the equality of outcomes.
Hard work, intelligence, inspiration and risk-taking deserve to be well rewarded. So should sensible saving and investment rather than extravagant “buy now, pay later” consumption.
But I believe in the welfare safety net. I’m proud of the National Health Service which provides free health care at the point of delivery, even if I’m horrified at some of the practices going on in this huge organisation.
In the USA, I’m probably in the middle of the Democrats and Republicans. I’d struggle to sit comfortably in either party and of course, with healthcare I’m too socialistic for even many Democrats.
Why Does This Matter?
I said early that I expect to see a recession that makes the 2008 to 2013 contraction look like a baby.
My writings are intended to help you think about the situation.
I don’t know the answers.
Like religion, I believe we each have to find our own way and accept personal responsibility.
If you follow what I write, some of it will fit comfortably with what you believe but other parts will challenge your views.
We have a mental bias that gives credence to confirming what we already think while ignoring anything that doesn’t fit in with our view of the world.
That’s very dangerous because it reinforces existing views.
I try to battle it. The two newspapers I spend most time with each day are the right wing Daily Mail tabloid and the left wing broadsheet The Guardian. Reading both helps to keep me aware of any biases in my thinking.
If you understand my basic beliefs, it will help you interpret what I write.
Instead of rejecting something automatically as wrong, challenge yourself to think about why you don’t agree with me.
Get To Know Me
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