My Life, Economics, and Finance

Democracy is one of the most precious human inventions and one of the few things I would be willing to fight for. When I read, that the German Social Democrats want to “democratize the economy” (The Economist 25.4.2009 pg. 34, The underdogs bark) I felt kind of happy. Democratizing anything sounds noble and especially when proposed by the left wing. World in which even the left wing has good ideas would be a perfect world.
There is a catch. When you realize what democratizing the economy means, it turns out to be far less noble than it sounds. Economy is made up of economic agents. That is consumers on one side and producers on the other.

What would mean democratizing the producer side of the economy?
The original meaning of the word democracy is “the rule of people”, in the present sense “one man one vote”. That is every single worker having a same voice as an owner of a factory. That means workers rather than the owner making decisions. That is communism my friends.

What would mean democratizing the consumer side of the economy?
That would for instance mean casting a vote on how much to pay for my shopping. I would (along with other shoppers) vote for ZERO. Provided there are enough of us, we would get our groceries for free. That is communism again…

It turns out that you can not “democratize” everything. You can not democratize economy in a same way that you can not democratize prisons.

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Demokratizace ekonomiky
Demokracie je jedním z nejcennějších vynálezů lidstva, je jednou z mála věcí za kterou stojí za to bojovat.
Když jsem si v Economistu přečetl, že německá SPD chce “demokratizovat ekonomiku“ cítil jsem se svým způsobem šťastný. Demokratizace čehokoliv zní krásně, zvláště ta navržená levicí. Svět ve kterém má dobré nápady i levice by byl dokonalým světem.
Celé to má chybičku. Když si uvědomíte, co demokratizace ekonomiky znamená, celý návrh “zkysne“.
Ekonomika je tvořena ekonomickými agenty. To je spotřebitel na straně jedné a výrobce na straně druhé.

Co by znamenala demokratizace výrobce?
Původní význam slova demokracie je vláda lidu, v dnešním smyslu “jeden člověk = jeden hlas“. Každý dělník by měl v továrně stejný hlas jako majitel. To znamená že na pracovišti by vládli dělníci ne majitel. To je komunismus přátelé.

Co by znamenala demokratizace spotřebitelů?
To by například znamenalo hlasovat o tom, kolik člověk zaplatí za nákup. Já bych hlasoval (spolu s ostatními nakupujícími) pro nulu.
To je opět komunismus.

Člověk zkrátka nemůže demokratizovat cokoliv. Nemůžu demokratizovat ekonomii, stejně jako nemůžu demokratizovat vězení.

It’s two weeks since the G 20 summit. I did have short article prepared but then I’ve decided not to be over skeptical and haven’t post it. What’s more there are already plenty of great articles/opinions on the web. I have decided to share three of them with you.

The first one is a WSJ opinion
G-20 Reality Check

There’s also another $50 billion for something called the Global Trade Liquidity Program, which World Bank President Robert Zoellick said will “provide trade finance to support businesses across the developing markets.” Translation: Subsidies for businesses from Bangladesh to Bolivia.

Then there is a nice article by Professor Wyplosz
The outcome of the G20 Summit: A sceptic’s view

In the end, except for the promises of more resources for the IMF, the summit has not succeeded in moving the agenda forward. Doing more was probably Mission Impossible and we must now go back where the decision power lies, at home in every country.

And finally opinion by Keith Hennessey a former Economic Advisor to President Bush,. He compares communiqués of the November 2008 and April 2009 G-20 summit. He is in particular focusing on following two paragraphs.
November 2008

12. We recognize that these reforms will only be successful
if grounded in a commitment to free market principles,
including the rule of law, respect for private property, open
trade and investment, competitive markets, and efficient,
effectively regulated financial systems. These principles are
essential to economic growth and prosperity and have lifted
millions out of poverty, and have significantly raised the
global standard of living. Recognizing the necessity to
improve financial sector regulation, we must avoid
over-regulation that would hamper economic growth and
exacerbate the contraction of capital flows, including to
developing countries.

April 2009

3. We start from the belief that prosperity is indivisible;
that growth, to be sustained, has to be shared; and that our
global plan for recovery must have at its heart the needs
and jobs of hard-working families, not just in developed
countries but in emerging markets and the poorest countries
of the world too; and must reflect the interests, not just of
today’s population, but of future generations too. We
believe that the only sure foundation for sustainable
globalisation and rising prosperity for all is an open
world economy based on market principles, effective
regulation, and strong global institutions.

So Hennessey BELIEVEs the CHANGE is for the worse. Given his job with the Bush Administration he is likely to be somewhat biased but I think he definitively has a point..

Chinese have recently expressed need for a new international reserve currency. I kind of understand that. If I had two trillion dollars in my drawer and my friend Bernanke would be printing dollars round the clock, I would start hating words like “depreciation, inflation”. Maybe you’ll finally realize that you’ve exported goods for which you’ve got paid with paper. Suckers!

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Cesky text
Čína nedávno vyjádřila nutnost zavedení mezinárodní rezervní měny. Musím říct, že jim dokonale rozumím. Kdybych měl v šuplíku dva bilióny dolarů a přítel Bernanky by tiskl dolary jako šílený, začal bych se bát slov jako “inflace, oslabení měny“… Třeba konečně pochopíte, že jste za své produkty dostali zaplaceno papírky. Blbci!

A lot has been said about the rise in inequality in the US. Starting from the eighties the Gini coefficient has risen from about 0,4 in 1980 to 0,47 in 2007. Considering Gini equal to 1 means all the income is received only by one person, rise of 0,07 is actually quiet a lot. That’s the story Democrats like to tell (and then start talking about taxing the rich). Well the thing is not as simple as they like to put it.
I came across a draft of a nice paper dealing with the problematic titled: Inequality and Prices: Does China Benefit the Poor in America? The authors are Chicago economists Broda and Romalis (God bless Chicago, home of Chicagoan school of Thought and Indiana Jones’s school, could it get any better?).
In their paper they argue that since rich and poor have different consumption baskets they also face different rates of inflation. If I am rich I don’t care about the price of a bus tickets, if I am poor I don’t care about the price of a new sports car. That clearly makes sense. Then they go on estimating the differences in the inflation rates faced by the two groups and conclude that ratios of the 90th to 10th percentiles of the US income distribution have not changed in real terms.
Where does China come in? Trade with China is often (justly) blamed to steal low skilled jobs from the US (there was a nice youtube video called “Keep the Shitty jobs at home”). We have all these trade theories and in general one has to admit that opening up to trade with China will have a negative consequence on the wage of an unskilled worker. The other side of the coin is that due to cheap exports from China the worker is going to face lower prices. They estimate that imports from China have reduced inflation faced by the poor by a 0.3 percentage point annually. This alone offsets about 30 percent in the official increase in the inequality.

I just wonder how much did the blast of the housing bubble change. I mean housing prices did surely account for a big proportion of the inflation faced by the rich. So that should make them better off (they’re facing lower prices now) and the inequality increase. On the other hand we have a second effect that is the destruction of wealth faced by the rich (assets, houses…). This second effect surely outweighs the first one. Seems to me that if anything the US society is now more equal than fifteen years ago…

I have recently posted a link to “WSJ column” (see previous post) arguing that government does not want back the TARP (Troubled Asset Relief Progra) money and so wants to keep an influence in the banks. This monday Goldman officially announced an intention to return the money.
Some argue that such move would disrupt the market. I think that are screams by unsuccessful ones, which could be used as an argument by the treasury and the FED not to take the money.

Will it be free market or banking socialism?

Bankers are nowadays viewed as banksters, bonuses as theft and the government as savior. My opinion is that most of this is well designed propaganda and the real beast is the state.

I did share my opinion on a letter one of the AIG people (“bankster”) wrote to his boss. Conclusion was: The politicians not him are the bad guys. My opinion and link to the letter can be found HERE.

When the US government started pumping money in to the troubled financial institutions in exchange for preferred stock some were calling it a beginning of a banking socialism. I have to say I was an optimist. I mean the government has no voting rights attached to thir preferred stock so it should technically have no influence over the company. That’s a theory. I got really worried when the Obama administration started forcing perfectly sound financial institutions in to debt for equity swaps with the troubled (read: on the verge of a bankruptcy) car makers. Isn’t this a banking socialism? And what is scariest is that the public will probably support the administration. “We’ve bailed them out with our taxpayers money (no you didn’t and even if you did this has nothing to do with it!), now they should help save our jobs at GM”.

There was a very good article in the WSJ opinion section this Monday. I strongly encourage everyone to read it (Even if you are an Obama lover, this might give you a perspective from the other side of the barricade.)
Obama Wants to Control the Banks

The government wants to control the banks, just as it now controls GM and Chrysler, and will surely control the health industry in the not-too-distant future. Keeping them TARP-stuffed is the key to control. And for this intensely political president, mere influence is not enough. The White House wants to tell ‘em what to do. Control. Direct. Command.

I’ve always liked the Game Theory. It’s a great theoretical concept, powerful tool and overall fun to study. Well, one thing is going through proofs in you “Game Theory Textbook”, the other is realizing, how often real life situation can be described by the Game Theory.
This week, I did experience the simplest of all Game Theory concepts, The Prisoner’s dilemma. Because I think Game Theory ought to be popularized I’ll share my experience.

I’ll just super briefly introduce the concept – SKIP IF YOU ARE FAMILIAR WITH THE PRISONER’S DILEMMA.
There are two prisoners who have committed a crime together. They are in separate cells and the police officer makes them an offer. If you confess and the other prisoner doesn’t you can go, he will stay in a prison for nine months. If neither you nor your colleague confesses both of you will get one month. If both of you confess you’ll get six months in the prison.
Since the prisoners are in separate cells, they don’t know what the other guy did. They can however do following thought experiment.
If the other guy mums than confessing is the thing to do (I’ll be immediately released). If he confesses, than confessing is the thing to do (if I mum I’ll get nine months if I fink I’ll get only six months). So finking is the dominant strategy no matter what the other guy does.

Let’s get to my real life example. We have to write an essay for my elective class The Politics and Economics of International Energy. It’s a take home exam and we have three hours to work on it. Of course there is no way, professor Luciani can check this. Everyone I’ve talked to is determined to spend more than three hours, effectively cheating but turning in a higher quality paper. Remember the prisoners, If I work for more than three hours and everyone else is honest (works for three hours) my paper will look really great and I’ll get a good grade. If I work for three hours and everyone works for more than three hours my paper will look pretty bad and I’ll get a bad grade. No matter what the others do, working more than three hours is the dominant strategy. Now if there was a way to coordinate and really spend only three hours on the exam, the quality of the papers would shift accordingly (to the level professor expects it), consequently grading would shift accordingly and we could enjoy the weekend.

I know all this, I even have a theoretical concept telling me: “ It is rational to spend more than three hours”. But I am not going to do it because a) I am an honest guy b), a lazy guy c) I can write a good essay in three hours…

In your face Nash!

(Nash got Nobel in Economics for his research related to The Game Theory. You’ve probably seen the movie “Beautiful Mind”)

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Cesky text
Vždycky se mi líbila Teorie her. Je to geniální teoretický koncept s obrovským množstvím využití ve všech společenských vědách. Jedna věc je procházet si důkazy teorie her a druhá je uvědomit si, kolik věcí ze života jí může být popsáno (Neuvěřitelné množství). Tenhle týden jsem si prošel učebnicovým příkladem Vězňova dilema (snad ten nejjednodušší koncept )

Teoretické vysvětlení v angličtině výše, nebo zde na české Wikipedii.

Pojďme přímo na můj zážitek. Na svou volitelnou přednášku „Ekonomika a politika mezinárodní energie“ mám napsat esej. Na vypracování máme tři hodiny, nicméně neexistuje způsob, jakým to profesor zkontroluje, esej máme zkrátka poslat někdy během víkendu.
Všichni moji spolužáci jsou rozhodnuti strávit nad esejem víc než tři hodiny. Sice budou podvádět, ale odevzdají kvalitnější práci.
Vzpomeňte si na vězně. Když budu pracovat víc než tři hodiny a všichni ostatní budou poctiví, odevzdám kvalitnější práci a dostanu lepší známku. Když budu pracovat tři hodiny a ostatní budou podvádět, moje práce bude vypadat jako zmetek. Nezávisle na rozhodnutí ostatních je pro mě tedy optimální podvádět a pracovat déle.

Všechno tohle si uvědomuji, mám dokonce teoretický koncept, který mi říká: “Podvádět je racionální, pracuj déle.“. Ale já to neudělám, protože jsem a)poctivý b)líný c)schopný napsat dobrý esej za tři hodiny.

A máš to Nashi!