Archives for posts with tag: skin in the game

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Middle income or middle class?

The terms “middle income” and “middle class” are often used interchangeably. This is especially true among economists who typically define the middle class in terms of income or consumption. But being middle class can connote more than income, be it a college education, white-collar work, economic security, owning a home, or having certain social and political values. Class could also be a state of mind, that is, it could be a matter of self-identification (Pew Research Center, 2008, 2012).”

OK, so even those who rely heavily on money as an indicator for who belongs to the middle class concede that there are other connotations to the concept.

Let’s consider the situation from a functionalist point of view. As in how the members of  various social strata react to the day to day challenges of the normal life.

‘Day to day’ meaning not only ‘normal’ things – waking up and brushing your teeth – but also things that we wish will never happen, although all of us know they are ‘normal’ occurences. A car accident, a broken leg or even having three children in one go when you were praying for one.

Usually the wealthy take them in one stride, those belonging to the middle class manage to cope – sometimes welcoming some help from their friends, relatives or even insurance company, while the really poor almost certainly sink under the burden. But not always.
Sometimes even the wealthiests loose it when faced with adversities they were not accustomed with while some of the poorest find it in themselves to rise from the ashes.

Then how about setting a slightly different system of ‘classes’: the extremely resilient, the ‘middle class’ and the very fragile?

As a rule of thumb it’s true that a certain amount of wealth does miracles when some resilience is needed so, roughly,  these two classifications look more or less the same, but, on a qualitative rather than quantitative level, we are speaking of two different things here.
When we are speaking of ‘money’ we are dealing mainly in ‘resources’ while when we’re speaking about resilience we have to take into account the attitude of the concerned individuals. It is true that the above mentioned attitude is, more often than not, heavily influenced by the affluence of the respective individuals but the function is hardly a direct one.

Based on these considerations – and on my personal experience of dealing with people, I’m going to propose the following synopsis.

The ‘resilient’ are those convinced they are able to cope, more or less on their own, with almost everything life can throw at them. Unfortunately some of them grow ‘spiritual callouses’, simply because they have never experienced any real hardships.
Or because they have over-compensated after dealing with those hardships, sometimes after succeeding to do so without receiving significant outside help.

The ‘fragile’ are those who, by lack of material resources, spiritual stamina or both,  behave more like leafs driven by the wind than like masters of their own fate – as every human being should.

By now you’ve probably figured out that  ‘my middle class’ is composed of individuals who have a certain degree of resilience but who, on the other hand, are perfectly aware that there are things on this world that they wouldn’t be able to face on their own.

In a sense, possession of money – or other resources, ‘encourages’ an individual to reveal his true nature.
If a person is naturally inclined to grow ‘callouses’ then being ‘insulated’ from the outside world by a thick wad of money will provide him with enough space to let those callouses grow but if his skin is ‘in the game’ then those callouses will be constantly shaven while interacting with his peers.
But if the stakes of the game are very meager – and the insulation provided to the players by their respective possessions is practically nonexistent,  then instead of growing callouses most of the players will be rubbed raw during the intercourse. Mind you, neither  the ‘stakes of the game’ nor the ‘individual possessions’ need to necessarily be of a strictly material nature.

In conclusion, the ‘callously resilient’ will tend to mind to their own – simply because their sensitivity towards the outside world is dampened by their callouses, the ‘fragile’ will tend to mind to their own raw wounds while those belonging to the ‘middle class’ will be the only ones really interested in maintaining the well being of the social organism. The one to which they ‘knowingly’ belong.
Because they are the only ones with enough time/energy/resources on their hands to consider the matter, the real interest to do so and the willingness to put some effort into this endeavour.

pent up anger

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It depends on the meanings we attach to these two concepts.

Yanis Varoufakis, Greece’s ex finance minister, is convinced that ‘Capitalism will eat democracy – unless we speak up.

Since he has some experience in this matter I’ll follow his line of thinking – for a while.

His point being that you can have successful capitalism in undemocratic societies – like Singapore and China – and that effective power has slowly shifted from the political sphere of the society to the economic one – which is undemocratic by definition.

Can’t say he’s entirely wrong, can we?

But we can say he’s somewhat confused…
So, he mentions Lee Kuan Yew’s Singapore and China as capitalistic success stories and then says that  the political sphere is gradually falling  under the yoke of the economic one… Well, last time I looked, in China the state was still in full control of everything that moved and the state was firmly in the hands of the politicians. Same thing was happenning during Yew’s tenure as Singapore’s good willed dictator.

Unfortunately there is some truth in his words when we look at what’s going on on the both sides of the Atlantic and that’s why I’m going to examine whether we have the same kind of capitalism in both situations.

By Google-ing the word I got two definitions for the concept.

The first definition that was offered by the search engine came from Oxford Dictionaries, “An economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state” and the second one came from Merriam Webster: capitalism is “an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market“.

Putting them together we have private ownership, private decision, free market and profit as a goal.

Are these enough to describe a reasonably well functioning economic system?
I’m afraid not.

Let me give you some examples.
The French state has a controlling interest in Renault and the land of Bavaria quite a sizeable one in VW. Renault is in good shape and VW was too, until very recently. So private ownership is not an absolute necessity.
In the US we had quite an interesting situation. Two out of the three big car manufacturers  had to be bailed out by the state. All three were privately owned so we must look somewhere else: the Ford family still has a powerful word in the management of the single one which didn’t had to be bailed out. In Europe the best run auto company seems to be BMW – again controlled by a single family, the Quandt’s. It seems that it helps a lot if those who call the shots have a long time interest in the well being of the company versus the situation in which the top management has (short time) profit as the single/obsessive target.
Coming back to Renault and VW, they can be compared to Singapore, China and, maybe, Spain. Singapore was able to develop a ‘capitalistic’ economy despite it being an authoritarian society simply because Lee Kuan Yew was a very special kind of ‘dictator’ – one that not only cared sincerely for the greater good of his people but also didn’t loose his head during his long stage at the helm. A similar thing happened in Spain – Franco was the sole dictator who had made preparations for a democratic evolution after his demise, while China had to wait for another good-willed dictator to grab the power – Deng Xiao Ping – before it could steer towards the present course. No other authoritarian regimes but these two have ever managed to replicate this feat – we still have to wait a little before pronouncing Vietnam as the third, and very few other publicly owned companies fare so good as Renault does.

So, we have rather strong evidence suggesting that ‘skin in the game‘ trumps blind insistence on short time profit and that a free, democratic, society offers greater chances for economic development than a authoritarian one. In fact the politicians that need periodic confirmation from the people they govern do have some skin in the game while the authoritarians are in a position that is somehow equivalent to that of the CEO’s of the huge corporations whose stock owners are so disspersed that practically don’t count much – the members of the board practically slap each-other on the back and are able to do practically what they want with the companies. Look what happened at GM, Chrysler and, for example, ENRON.

But how free should be that society in order for capitalism to thrive?

Could it be so free that a guy could come from the street and claim your house as being his own? No?

So we need a free but orderly society. One where private property changes hands only when its owner says so – or has previously entered into a contract which stipulates that in certain conditions that transfer has to take place.

Meaning that in order to have a functioning capitalist society we need not only private ownership but also private owners who have enough trust in each other to start making business together.

You see, the feudal lords of the Dark Ages did have a lot of private property but capitalism couldn’t take hold in earnest as long as the (absolute) monarch could strip a man of his property and give it to somebody else. They couldn’t enter into (longish time) contracts because the era was dominated by huge uncertainties regarding various aspects of the social and economic life.

In fact it is exactly this well tempered freedom that is the crux of functional capitalism. Enough freedom so that everybody could feel confident that he is his own master but tempered by rules enforced in a pwerfully enough manner to give everybody sufficient trust that most contracts will be executed faithfully.

In this sense for capitalism to work properly we need to have a market that is free in more dimensions that one.

It has to be free from political intrusion in the sense that the government should leave it alone as a rule of thumb but also that the same government should keep it free from becoming cornered by a single group of interests.
In fact there is no difference from a market that is run by a governmental agency or by a monopolistic corporation – no matter if the latter is private. As soon as decision making becomes concentrated in too few hands mistakes starts happening. And their effect accumulate until the system finally collapse. Or is dismantled by some ‘exasperated’ more powerful agency – as Standard Oil and  ‘Ma Bell’ were dismantled by the US government. Which, by doing so, created the premises for  the huge development of those two respective markets – oil and communications.

Only this freedom of the markets can seldom be preserved by an authoritarian regime. Yew’s Singapore and contemporary China are exceptions, not the rule. Most authoritarian regimes cannot resist temptation and start meddling in the economic life of their countries. By doing so, they introduce a lot of ‘noise’ into the system. Eventually, this noise drowns the useful signals and ‘blinds’ the decision makers.

Same thing happens – and here Varoufakis has a valid point – when economic agents become so powerful that they can dominate the policy makers. The politicians can no longer preserve a balanced stance towards the economy and give in to ‘special interests’. This way the markets loose their freedom, with all the malign consequences that come with this situation. Among them, the lack of trust that slowly creeps in the souls of those who have to do business in the no longer free markets. Which lack of trust is very bad for all those involved.

And another thing about which Varoufakis is absolutely right. A lot of money are not being moved through the ‘front doors’. Not that they are not invested at all but because they are kept somewhat hidden they do not contribute as much to the well being of the world economy as they could/should.

2.1 $ trillion have been accumulated, as of  October 2015, in off shore accounts by the top 500 American companies in order to avoid taxes and
Between $21 an $32 trillion have been hiding in 2012 in various offshore jurisdictions.

Why is that? Simply because those who are called to decide about these money do not ‘trust’ that by bringing these money home and by investing them there, after paying the taxes, will be able to generate profits equivalent to those produced by leaving them off shore?

So what should we do? Tell them ‘democratically’, by electing somebody who is crazy enough to implement such a measure, to bring them home? Or even  confiscate them, one way or another?

I’m afraid that here I part again ways with Mr. Varoufakis. And with Aristotle: the way I see it democracy is not ‘the constitution in which the free and the poor, being in majority, control government‘. That would be ‘mob rule’.
A truly democratic process starts before the vote. When every stakeholder can make its point known to those who are going to cast a ballot so they’ll be able to do that having a reasonably clear understanding about what’s going on.

Frankly I’d rather rephrase Varoufakis’ message. ‘Corporatism has a tendency to disembowel democracy and transform it into ‘mob rule’ – the situation where the poor are no longer that free simply because they are convinced through ‘unholy’ methods to vote one way or another.

What can be done? Explain, loud and clear, that if jobs disappear the same thing will happen with the aggregate demand?
Explain that by giving their workers as little money as they can in reality the results are way worse than if the wages were as high as the companies could afford?
Ford didn’t give his workers more money because he loved them but simply because he had understood that in the long run he would be better off himself by doing this, you know!

This morning I came across a Stratfor analysis.
Two brief excerpts:

“This influence, especially among Sunni locals in not just Iraq but also Syria, will be critical if Turkey is going to be able to manage the jihadist threat long after the United States declares mission accomplished and moves on.”
“Not only does Turkey feel that it will have to deal with the mess in Syria long after other stakeholders have moved on, it also knows that the United States expects Turkey to manage the Syrians as well as other regional matters. Turkey has not forgotten how, during the days of President Turgut Ozal, Ankara cut Iraq’s export pipeline in 1990 at the behest of the United States in the run-up to the 1991 Gulf War but was later left with the aftermath as promises of aid disappeared with the subsequent change of U.S. administrations. This bitter experience informed Turkey’s 2003 decision to refuse Washington access to Turkish territory for a northern invasion of Iraq. At the same time Turkey is deeply worried about being caught between Saudi Arabia and Iran, who are engaged in a vicious proxy sectarian war.”

Am I wrong in detecting here a fresh understanding?
About the need for genuine effort to tie all loose ends that were caused while solving a problem before declaring that problem solved?

You can read the whole article here, it is well worth the effort:

Turkey Must Tread Carefully Against Islamic State is republished with permission of Stratfor.”

 

 

 

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