The effect of culture, media, and psychology on the real economy...

[yudeng2004]

I have thought a lot about the economy in the last year, and I noticed that we often discuss the effect of culture,media and psychology on the market or a company, but rarely do we discuss its implication on the real economy and the country.

 

The economy is simply consisted of people providing goods and services that are needed and wanted by others. The only way to produce goods and services is to do work, and the only way to increase the quantity, quality, and variety of goods and services is through innovation.

 

It would seem logical to think that the best way to stimulate the economy is to enhance education, encourage innovation, and create a fair and competitive system based on meritocracy.

 

While the market is down, the banks' balance sheets are broken, and the fed is using actions not ever seen before, rarely mentioned are the pillars that make up the core of an economy - its people.

 

K-12 education in the US pales compared to its university system, and in the last 10 years, we have also rewarded the trading of value in such a way that encouraged many intelligent people to pursue careers in finance as opposed to science and technology.  These factors have long-term consequences much greater than the gyrations of the market, interest rates, or banks' balance sheets.

 

I have many intelligent friends from the Ivy League school I went to, and for the last 4-5 years, the majority of them worked at ibanks or hedge funds, and over these years, it has eroded away certain qualities that they used to have - hunger, courage, curiosity, and creativity.  They have been trained to do work based on 1 line of thinking "how do I gain the most $$ per energy spent" and they now think that is the representation of achievement.  About 80% of them have gained about 40+ lbs, look like they are 40 when they are still in their 20's, and are worried to death about losing their jobs in the financial sector.

 

If you are 70, and about to retire, I can understand your worry about your nest egg and such, but in your 20's and fearing the future??? Is it too late to learn ANYTHING in your 20's (other than sports which you peak in your early years).  What has happened to their spirits and will?

 

I think as a young person, one should not fear a loss of job, or the loss of net worth, and certainly not the future.  As much as I hate what the ibanks did with their synthetic products, I hate what they did to a young generation of bright young minds even more. 

 

If a strength of a company can lie in its culture, so too can the strength of a country. Buffet cares more about the culture of wells fargo than the balance sheet of wells fargo.  And I think we should have a discussion about the culture of the US with relation to its economy as opposed to the balance sheet of the US.

 

Anyone care to comment?

[nodnub]

yu deng,

glad to see you made it here from the other board.

 

I think the character of those finance employees at any age can be changed by a change in the stimuli they are exposed to.  This change can happen in a relatively short period of time (a couple of years) if they are exposed to new stimuli over that time.  To break free of their current mindset they will probably need to lose their jobs.  The old maxim that Munger likes is very true: "whose bread i'll eat, his song I'll sing" (it is hard to convince a man to believe something when his livelihood depends on believing the opposite).  

 

We humans are adaptable and flexible.  If there is a long recession it will teach many people the value of thrift, community, friendships, producing some of your own food (though I'm not saying that laid off I-bankers will be gardening in Manhattan).  Many people in the 1920s were free spenders, and I suspect many of those same people learned entirely different lessons during the next decade--lessons that they carried with them all of their lives.  Spirit and will are built during long periods of difficult times.

 

There are parts of the US culture that need to change to strengthen the country (less greed, overconsumption, less waste, improved recycling, etc).  Obviously, I think most other first world nations have the same problems, some of them in varying degrees.  

 

I would be interested to hear other thoughts and responses.

 

[benhacker]

Deng (welcome back), I agree whole heartedly and I know many of those people you mention... and quite frankly, given the fact that many of us do *this* for a living, we may be those people as well.

 

I touched on this topic in my annual letter (sorry for the self link, my first and likely last). http://www.remickcapital.com/files/LetterQ42008.pdf (bottom of page 3)

 

I think Grantham also touched on the concept of 'real wealth' in his letter back around that time.

 

I have a lot of hope and faith in American ingenuity, but I also get concered when people learn the wrong lessons.  "The Chinese are taking our jobs" when in reality people should wonder why we aren't competitve.

 

We need to work harder and be smarter, and change our value structure a bit.  It won't happen until we are really up against the wall, but it will happen.

 

Those are my thoughts though.  I like to say to people, "you don't get wealthy by trading stocks or houses back and forth between your neighbor".  You actually have to do something real...

[yudeng2004]

yu deng,

glad to see you made it here from the other board.

 

I think the character of those finance employees at any age can be changed by a change in the stimuli they are exposed to.  This change can happen in a relatively short period of time (a couple of years) if they are exposed to new stimuli over that time.  To break free of their current mindset they will probably need to lose their jobs.  The old maxim that Munger likes is very true: "whose bread i'll eat, his song I'll sing" (it is hard to convince a man to believe something when his livelihood depends on believing the opposite). 

 

We humans are adaptable and flexible.  If there is a long recession it will teach many people the value of thrift, community, friendships, producing some of your own food (though I'm not saying that laid off I-bankers will be gardening in Manhattan).  Many people in the 1920s were free spenders, and I suspect many of those same people learned entirely different lessons during the next decade--lessons that they carried with them all of their lives.  Spirit and will are built during long periods of difficult times.

 

There are parts of the US culture that need to change to strengthen the country (less greed, overconsumption, less waste, improved recycling, etc).  Obviously, I think most other first world nations have the same problems, some of them in varying degrees. 

 

I would be interested to hear other thoughts and responses.

 

I am not sure if everything is based on incentives.  I have so far done ventures where I have shown talented people that they can earn real revenues doing something, but it does not seem to motivate them.  It is NOT the case that incentives work like expected.  Sometimes people are just simply lazy.  They are happy to put in 50% effort to earn 100k/year as opposed to put in 150% effort to earn 1 million/year.

 

I have met many entreprenuers the last year, and I am convinced that they have some kind of mental short-circuiting (the thing that makes them passionate).  I met a girl who quit 150k salary right out of college to start a company that had crappy prospects because her reason is "I cannot work with dumb finance types from business school, I will quit regardless of how much I am earning".  She's now doing about 20x as well, but still, it was a huge huge risk and her parent at the start of her venture told her that if she failed, they wouldn't support her.

 

I think the motivation to be independent and the motivation to achieve at the core, seem to be even stronger than monetary incentives.

[SharperDingaan]

 

Keep in mind that NA really hasn't had a wake-up call in well over 100 years. No bombs/destruction, no mass starvation, no pogroms, no forced fleeing in the middle of the night, no rebuilding from scratch - in short, no growing up. The culture substitutes with isolationism, holywood idealization, 'reality' television, & 'cool'.

 

If you never travel outside of NA, live in comfortable surroundings, & can readily borrow the funds to go to school - you will end up drinking the kool aid. And because everyone else (in your circle) is doing it, it must be right. In the 70's the 'glamour' job was "rock star", today its "investment banker" - & if your ethics slip along the way it doesn't matter, 'because everyone else is doing it'. Mania.

 

The culling of I-Bankers (both real & wanna-be) is well overdue, & the profession is finally getting de-glamourized. Hard to be cool when Failed In London Try Hong-Kong (FILTH) is starting to get publicized in too many of the wrong places! Yes its ugly, but so is taking the drugs away from an addict; but without it there will be no 'after'.

 

Worst case the I-Banker pissed away 10 years of his/her life in a wrong decision. He/she found out they weren't 'perfect' - & join the rest of the world!

 

Most of that innovative industrial R&D research gets funded by private/public partnerships, & many of those folks making the decisions will be former humbled I Bankers. The good news is that maturity does finally catch up with brains.

 

Little harsh on I-Bankers, but richly deserved!

 

SD

 

   

 

 

 

[yudeng2004]

Deng (welcome back), I agree whole heartedly and I know many of those people you mention... and quite frankly, given the fact that many of us do *this* for a living, we may be those people as well.

 

I touched on this topic in my annual letter (sorry for the self link, my first and likely last). http://www.remickcapital.com/files/LetterQ42008.pdf (bottom of page 3)

 

I think Grantham also touched on the concept of 'real wealth' in his letter back around that time.

 

I have a lot of hope and faith in American ingenuity, but I also get concered when people learn the wrong lessons.  "The Chinese are taking our jobs" when in reality people should wonder why we aren't competitve.

 

We need to work harder and be smarter, and change our value structure a bit.  It won't happen until we are really up against the wall, but it will happen.

 

Those are my thoughts though.  I like to say to people, "you don't get wealthy by trading stocks or houses back and forth between your neighbor".  You actually have to do something real...

 

ben - that was some nice writing. Now regarding education - I remember when I was in China, when I took an exams, the scores of every student was POSTED ON THE WALL for EVERYBODY to see, so everyone knew who the best students were and those who didn't do well were embarrassed by this.  This is crazy brutal but IT WORKED.

 

A lot of this has to do with what is considered COOL in school.  When I was in China, the smart kid is the cool kid.  In America generally it is someone who dance/sing or play sports well.  This is a SOCIAL INCENTIVE and it has huge effect on the behavior of kids.

 

Also today, education level AND PRODUCTIVITY has been polarized.  For example, if you look at some of the entreprenuers of today and the amount of productivity that they are generating vs the average, it is crazy.  If you work in a factory, at most you can be 2 times more productive than the average person, but if you are a computer programmer, a systems designer etc you can be HUNDREDS TIMES more productive than the average programmer.  That doesn't diminish the value of the average programmer, however.  We are slowly becoming a society of not only concentrating wealth, but CONCENTRATING PRODUCTIVITY as well.  The internet is also concentrating productivity.

[benhacker]

Thanks Deng.

 

I've thought a lot about the concentration topic as well.  Essentially, as time goes by, we should all be getting wealthier as the economy increases efficiency, and productivity etc.  However, the growth is driven by a tiny minority, and that is what is hard to figure out.  Obviously, meritocracy is key to encourage and reward the highest performers, but how to distribute the spoils.  I suppose this is the never ending socialism vs. capitalism debate, but when the ratio is 3:1 the discussion is simpler than when it is 1,000,000:1.

 

I struggled with the idea of becoming a *true* engineer when I was in school for this reason.  I achieve a EE major, Biz minor, was cum laude, and probably in the top 10% of my University (just an average school; no Ivy League here... ;-) ).  But I could tell that a few of my friends who were the genius curve wreckers were clearly 100 times more productive than I was, so I never could motivate myself to do exactly what they were doing (what's the point?).

 

I don't view my response as unnatural, but given the implications it scares me.  We can't just have 2% of society do the work, pay the taxes, generate the productivity.  Deomocracy or the Republic would cease to function.

 

No answers, just musings.

 

From an investing perspecitve, finding those companies who truly deliver true societal value is the key takeaway from this I think.  There are very few though.

 

Ben

[snailslug]

We can't just have 2% of society do the work, pay the taxes, generate the productivity.  Deomocracy or the Republic would cease to function.[/Quote]

 

This reminds me of a marxist economics professor I had long ago who said his idea of communism would be that machines/robots could make everything and we could all sit on the beach and enjoy life.  LOL.

[Guest longinvestor]

<I have many intelligent friends from the Ivy League school I went to, and for the last 4-5 years, the majority of them worked at ibanks or hedge funds, and over these years, it has eroded away certain qualities that they used to have - hunger, courage, curiosity, and creativity.>

 

Kudos for stating this fact, the real "elephant in the room" of this decade, maybe two. The younger generation has moved so far away from the real value added part of the economic engine.

 

I would encourage all on this board to get a copy of John Bogle's book "Enough". This is exactly what he has said. The lucidity in that book is great. He starts off by saying that society is made up of three groups,

 

1) The producers or value adders(farmers, butchers, hair stylists, manufacturers et al.)

2) The sellers or intermediaries (salesmen, stores, distributors et al) who bring the produce of 1) to society

3) money handlers (accountants, bankers, financers  etc.)

 

Bogle says that for a long time much of the cost was in 1), followed by 2) and 3). Stated in another way, the value created by 1) goes down with 2) and 3) activities. So 2) and 3) have to be reasonably minimized. In good times it was.

 

All that has been changed on it's head in the last 20 + years according to Bogle.

 

Lately the costs of 3) is so high that society is unable to handle that. Essentially the 3) group is actually taking more value away (much much more) than 1) and 2) can ever produce and distribute.

 

Bogle says this is not something that can be improved per se. It must be eliminated!

 

The success of an investment in the Vanguard Index fund hinges upon this principle diligently implemented by Bogle . He talks at length about how he keeps costs low within the fund family.

 

I think the younger generation (and society) overall is in for a rude awakening.

 

This is why companies like BRK are the only ones one should be invested in for the long term. Thanks to WEB and CM, that BS has not been allowed to get into the BRK culture.

 

The other company that is worth studying for what it has done to teach society about the idea of true "value added work" is Toyota. Toyota's slow, steady but sure success in the post-WWII age is probably the single best model out there to straighten out our thinking.

 

[claphands22]

Good post yudeng; I'm happy to see you're sharing your thoughts again.

 

Using culture as guide to the future of an economy is a good idea. As long as you are not the proverbial man with a hammer.

 

In college (2003-2007) my friend used to tell me "When the history books remember us - they'll probably remark how forgettable we were. We've invited emo music and that's about it"

 

I live in Taiwan now. When I first got here, I couldn't believe how thin and hardworking everyone was. People here are embarrassed if they don't know something. Most people here know 2-3 languages and within the next 7-15 years, the young people will be speaking English as well as a Hong Konger. As I'm writing this, my Taiwanese girlfriend is writing her thesis on cognitive science....in English.

 

If people get the government they deserve; we are also going to get the economy they deserve. This is probably on of the reasons Jim Rogers immigrated to Singapore.

 

I don't believe America is going to change either; we are are like a dog with a bone. 

 

-- I see some discussion on productivity capabilities.  Any thoughts on how the economic landscape will change if we move from Mediocristan to Extremistan? 

 

[Guest Broxburnboy]

Empires have a life cycle. They start with an aggressive, confident, united people and end with a passive, self centered and divided  populace. Their governments start by being efficient and egalitarian (relative to the times) and ends up being elitist, corrupt and self destructive. Has Western (Anglo Saxon) civilization reached that point?

[yudeng2004]

 

-- I see some discussion on productivity capabilities.  Any thoughts on how the economic landscape will change if we move from Mediocristan to Extremistan? 

 

 

This is the key here - the most HEALTHY way to progress from this point on is to have productivity of the extremely few create efficiencies but have a EVEN BIGGER SERVICE sector.  So sure I can be a genius and design an assembly line that decreases the cost of computers 10-20x, but what it also means is that there must be accompanying HUMAN SERVICES created that people need and want along those products.  If we have smaller and smaller amount of very very productive people, then new sectors must emerge that offer products/services never seen before.  The ONLY WAY to keep the majority of people employed in a society where productivity is more and more concentrated, is to CREATE MORE HUMAN SERVICE.

 

People will always want or need something, and as long as people want or need things, there will be an economy.  But if wealth is entirely related to productivity, I am not sure if the current trends will work from a SOCIAL point of view. 

 

 

[claphands22]

 

 

This is the key here - the most HEALTHY way to progress from this point on is to have productivity of the extremely few create efficiencies but have a EVEN BIGGER SERVICE sector.  So sure I can be a genius and design an assembly line that decreases the cost of computers 10-20x, but what it also means is that there must be accompanying HUMAN SERVICES created that people need and want along those products.  If we have smaller and smaller amount of very very productive people, then new sectors must emerge that offer products/services never seen before.  The ONLY WAY to keep the majority of people employed in a society where productivity is more and more concentrated, is to CREATE MORE HUMAN SERVICE.

 

People will always want or need something, and as long as people want or need things, there will be an economy.  But if wealth is entirely related to productivity, I am not sure if the current trends will work from a SOCIAL point of view. 

 

 

 

yudeng, I've been thinking along these lines; wish I was articulate enough to write them.

 

I really can't see what new services will be created in the future. I guess Black Swans are by nature impossible to predict...just hope one appears soon enough.

 

I actually see a huge service industry "about to" collapse because of new technology. This is going to sound quaky, but I believe the electric car, could possible cause a huge contraction in auto-service related jobs. Since electric cars need very little service (no internal combustible engine or brake pads) it will put 50%+ of auto mechanics out of business. Which is a shame, because it is a one of the few jobs you can do independently and is intrinsically rewarding. 

 

 

....I wish I could connect a thought I have about the problem of Mediocristan and Extremistan with

 

"All of man's misfortune comes from one thing, which is not knowing how to sit quietly in a room." - Pascal

 

but...I can't figure it out yet. Maybe there is nothing there.

 

[oldye]

Maybe Dengyu, and the rest of you should hang out with more engineers, I promise that you won't have such a bleak outlook.  I don't think the outlook has ever been any different than it is now, in fact I'm damn sure that the standard of living for the world will increase at a higher rate than it did in the 20th century.

As long as we have a system that adequately rewards the top 10% of the population the rest of us can just tag along.  We really only needed 1 Einstein and Edison. 

[Parsad]

I agree with Oldye.  I think humanity will find better and more efficient ways of existing.  New technologies and innovation will always spring forth as long as there is a capitalist system in place to reward such invention.  In many ways, the world is already far ahead of where our imaginations believed we would be at this point in time 25 years ago, let alone 50 years ago.  Our lifespans and quality of life have also continued to increase.  The world will be a far better place in the future.  Cheers!

[mpauls]

I attached a document that is a running work in progress.  It's mostly just some thoughts I put down for my own use but thought it was relevant to this conversation and thought I'd share.  Not to worry its nothing too insightful. 

[yudeng2004]

Maybe Dengyu, and the rest of you should hang out with more engineers, I promise that you won't have such a bleak outlook.  I don't think the outlook has ever been any different than it is now, in fact I'm damn sure that the standard of living for the world will increase at a higher rate than it did in the 20th century.

As long as we have a system that adequately rewards the top 10% of the population the rest of us can just tag along.  We really only needed 1 Einstein and Edison. 

 

I am doing more engineering work myself now than when I was employed at microsoft.  Investing takes only 30% of my time right now.  But I have observed something with the engineers/entreprenuers that I hang out with - the productive capacity of the ultra-skilled few has been increasing at a faster pace than the productive capacity of the average.

 

I think more and more productive powers are concentrated in the hands of a few people, and their relative values have increased dramatically in the last few decades.  What this means is that unless we move even more into Human Service based jobs for the many, we will likely find ourselves with more unemployment.

 

See, labor used to be more based on physical work - the difference between the best physical laborer vs. a regular person was not in the order of ten or hundred-fold range.

 

Now, labor is going to be more and more based on intellectual work - and intellectually the difference between people can be huge.  So what this means is that we better hope there is a lot of real and value-added work that the average person can do to keep employment high and retain a middle class.

 

I do not doubt our ingenuity at all, but it's just how do we retain a middle class which is really a social problem more than an economic one, that is worth thinking about.  I mean you don't want to have a society where a bunch of geniuses own automations, programs, robots, and machines, and an army of unskilled service people like you see at walmart.

 

That is increasingly what society will look like as we become more and more efficient.

 

How do we become more economically more efficient but retain the middle class?