Friday, 18 February 2011

I want to do something different this time and generate a discussion. There are quite a few of you that are students and it would be interesting to see your opinion on education system as a whole.

Our current education, almost in every country in the world, lacks any teaching on the most important subject: money. That is to say, that if we live in a capitalist world, then surely the Study of Money should be a priority. Currently the curriculum is centered around jobs, and teaching every student on how to become an employee. My personal opinion is that through your university degree (outside of professional degrees) you demonstrate that you can sit still in a boring class/office, complete assignments on time, and that it's likely you have a large millstone around your neck in the form of debt, that will make sure you keep you head down.

"One day I will have my own business"
Education debt is really very interesting. Both in UK and USA this debt stays with you even if you go bankrupt. In UK, at the very least, it is written off if you can't pay it off in 25 years. The trouble with these kind of debts is that it makes it very hard to get a bank loan if you want to start a business. That is why majority of MBA students (read: students who actually study how to start/run businesses) will work for someone else.

The big pro of MBAs and similar degrees is that it allows you to make connections. It's often the connections that only matter in corporate world; in 2006 39% of all Fortune 500 companies had an MBA. However, a study done by BusinessWeek found that shareholder returns of companies led by CEOs with MBAs were significantly worse than of those led by non-MBA CEOs.

In summory, if you want to get the most out of a capitalist system and start a business, why would you go to University? So unless you are persuing a proffesional degree (medicine, law, accounting) you are a really setting up your self to work for someone else.

Wednesday, 16 February 2011

Debt is Slavery

I've planned to write about Higher Education but while researching it I realised that a big part of this illusion is debt. In fact if one would to really look into causes instead of symptoms of every day illusions then debt would be right up there. Since we live in capitalist world which centers around money, and since all money is debt, then you can see how it's really debt that keep the world turning. (I will go into more detail on this particular point another time.)


Matt Barrett, CEO of Barclays once let it slip that he didn't borrow on credit cards as it was too expensive; a remark that cost him his job. However credit cards aside, there are so many ways to get into debt that one can easily see why most of us are. Debt that once had social stigma attached to it or down right illegal is now the norm, constantly reinforced by the media and our education (or lack there of).

The average person will start their adult life with student and/or credit card loans. Then there are personal loans, store credit and finally mortgage. To top it all off, we are all servicing the government debt through our taxes. It's very difficult to avoid such an assault of debt and those that get caught are forced keep their heads down and work to keep paying off their debt only to get suckered into getting more into debt with a neatly pre-approved credit card in your mail.

The truth is that nothing prepares us for this. Money being so important in our lives is somehow omitted in school curriculum and the average parent doesn't know better as statistically they'll be up their ears in debt also. This complete ignorance, together with peer pressure to keep up with the media portrayal of the Joneses, is what has been causing the rich-poor gap to grow bigger in the last 40 years that easy credit has been available.

“Have you ever asked yourself how people who immigrate to the United States can come here, get a low-paying job, and open their own business five years later? How can they do that, making around minimum wage, when you can’t, making more than minimum wage? They save. They save 50 percent or more of their salary. They don’t go into debt, they work hard and make other sacrifices, so they can buy their own business and control their financial destinies.”

Quote taken from Debt is Slavery: and 9 Other Things I Wish My Dad Had Taught Me About Money. An easy quick read that will give more relevant life lessons then your school ever did.

Thursday, 10 February 2011

Cheap seats don't sell

It could sometimes be noted that it's not the companies who are to blame for high prices, but the consumers them selfs. Since most people don't have any true understanding what things are worth, we go by the price. As I had mentioned in my earlier post, people more likely then not when presented with a choice will go for products that are in the middle price range.

This effect is so strong that sometimes retailers are practically forced to use in order to make a sale. Consider the following; when Williams-Sonoma first started selling bread-makers they had just one model retailing at $279. Sales were slow until a newer and bigger model went on sale for $429. No one bought the bigger version, but sure enough the original breadmaker suddenly looked cheap in comparison and the sales doubled.

In some cases whole brands have been built around this concept. How many $10,000 bags do you think Gucci or Burberry sells? Chances are that they've never sold a single one, but what it does do is make everything else in the shop look cheap. These brands will make majority of their revenue on scarves, perfumes and even keyrings.
$12,000 worth of leather
When I can afford it I like to go to a theater or the opera. Here they really don't have much choice in how they price the tickets. In fact this applies to sports events and music concerts too, and if you ask tickets sellers they will tell you that 'cheap seats don't sell'. If you sell tickets too cheap then everyone will think there is something wrong with the show and the house will be half empty. What's more, even if you don't sell your tickets at the premium price then you just send them off to discount stalls where the punters can get a 'great deal'.

This works so well that it's an industry standard and often up to 40% of all tickets end up at the discount stalls where they are quickly sold. The face value on the ticket is the anchor and it doesn't matter how much it is, because it is the "discount" that will draw in the punters.

Wednesday, 9 February 2011

Paying for air

Our current economic theory in essence is based on supply and demand. If there is an abundant supply then we will demand less and so the price will go down. Imagine what the last strawberry on earth would fetch on an open auction. Limit to supply is called scarcity and underpins capitalism.

There is one problem with that though; humans are an inventive bunch and we are slowly solving the problem of scarcity. For example, apart from initial development cost most media is free or nearly free to distribute. Hell, you could even make CD's out of corn starch with individual CD being so cheap that it's almost free.

Diamonds are the most well know illusion out there. The rarest gemstones in the world are Rubies, yet as you well know diamonds fetch a far higher price. For diamond companies it is important to create scarcity to keep diamonds highly desired and therefor highly prized.

The biggest con of Western capitalism though has to be text messages. A text message is limited to 160 characters each requiring a byte. It's so small that it is piggybacked onto the phone network, occupying otherwise unused space in a control channel used for network maintenance.  If you bought 1GB of data use for $100 then by right your text message would cost you 0.00149¢. In other words with 1GB of data you could send 6,710,886 texts. Great, if you don't sleep, don't eat and send a text message every 10 seconds you can keep your self entertained for 2 years, 1 months and 16 days. 
"Charging them to RECEIVE messages?! That's brilliant!"
The price of anything in reality is what you can be persuaded to pay. In turn if we think that a particular product is scarce we are willing to pay more. That's how mobile phone operators have been able to increase price of messaging while the true cost has been decreasing even more.

I wholeheartedly recommend Priceless: The Myth of Fair Value (and How to Take Advantage of It) for any economics student who wants to find out more.

Tuesday, 8 February 2011

In for a penny, in for a pound

In the 1990's IBM introduced two nearly identical products, LaserPrinter and LaserPrinter Series E. The difference between them was that the former printed at 5 ppm and latter at 10 ppm. Naturally one cost more then the other. On closer inspection by a consumer testing lab found that the cheaper version had one extra component that intentionally slowed down the printer.

"This thing's too fast! Slow it down."
The same strategy was followed by Intel with their 386SX chip, designing the chip with an integrated mathematical coprocessor that was then disabled creating two separate products with two separate prices.


These are just two examples of many. In fact when you think about it this happens in every industry by all kinds of companies. The worst offenders being the software industry. There are for example 11 different versions of Windows Vista with 11 different price tags.

Corporations know that people like to have choice. Having choice allows consumers to compare and contrast but in a very particular way. In fact corporations know exactly how to set it up so you buy what they want you to buy.

"At THAT price it MUST be good"
Imagine you go to buy a bottle of wine. The shop in question has two bottles, Spanish Rioja and French Merlot. In this situation most people will choose the cheaper one, fruity Merlot. Now imagine you've just found a third bottle on another shelf which is more expensive then the two. Suddenly the Rioja is not so expensive and majority will make it their choice.


This effect is called price anchoring and is the oldest trick in the book.  Products in the middle price range will often represent the biggest margin for the retailers and least value for consumer.

There is a lot more to this subject so I will come back to it next time. If you want to find out more I highly recommend Priceless: The Myth of Fair Value (and How to Take Advantage of It) and Information Rules: A Strategic Guide to the Network Economy.

Monday, 7 February 2011

Who owns my house?

(ō'nər-shĭp')
n.
  1. The state or fact of being an owner.
  2. Legal right to the possession of a thing.
Idea of ownership is an interesting illusion. First, you own something if you say you do. Second, that ownership right is confirmed by the government through documents like house deeds. That in turn is backed by police, courts and military.

Great, I hear you say. As long as the society is in status quo, and we have democracy then your right to own your house is solid. Not exactly. If you have a mortgage then the house belongs to the bank. Also, mortgage or not, everyone must pay council tax (property tax), failure to do so risks you going to prison and your house sold.

Historically, property ownership came about after abolishion of serfdom (ownership of lower classes). It is a handy way of tying people to their property, so they work to pay for the upkeep and do not make trouble for fear of loosing something. In effect instead of serfdom, people are owned by their property and property is really owned by the government.

Sunday, 6 February 2011

Grand Illusion - Styx



Our lives are filled with Grand Illusions that largely go unnoticed. So my dear readers I invite you listen to this awesome song and be ignorant no more.

We would love to stop this but we can't (don't want to)

Every once in a while there is a story about tax havens and how the money is disappearing into them. There will be a public outcry, some spokesman will say that they will shut it down, and then all goes back to normal. It would often be cited that they would like to do something about it back they can't because the tax havens are under their own sovereignty. That is of course not the whole story. Most tax havens are controlled by larger counties for the purposes of politicians and the elites to hide their money. Further more like in the case of UK's Cayman Islands these offshore states are used to siphon out money from USA and South American Countries. Often that money comes from organised criminals.

This subject is far too large to discuss in this blog and if you want to find out more I would strongly recommend Treasure Islands: Tax Havens and The Men who Stole the World by Nicholas Shaxson.

I will leave you with this; A Caymanian lawyer in the 1970s explained how his clients would worry about Fidel Castro's Cuba next door and would insist on special clauses to compensate them if Castro invaded. 'I have to explain that Castro wouldn't find any [money] in the safe,' he said. 'They're all really held in New York or London.'