Wednesday, 20 January 2016

Conversation - on bonuses and the economy

[Note: this conversation happened some time in early Dec 2015.]

"Civil Servants to get 0.65 months year end bonus. Last year was 0.8 months, The year before was 1.1 month. Every year, the bonus is lesser and lesser. Next year if  can get 0.5 months, will be lucky! Maybe even lower."

"Aiyah! Harng Zheng Pai. But what goes down, will come up one. Don't worry!"

"I'm not sure that it will come up so easily. The world is different today, from say, the early 80s."

"Eh, since when you become civil servant you care so much about their bonus."

"The newspaper report civil service bonus because it is a good gauge of how much bonus people should expect. How much bonus civil servants get is an indication of how well the economy is doing. Of course every sector will have their own idea of what is a good bonus, but the civil service bonus is a good "pow-ka-liao" indicator of how we are doing."

"OK. but no need to be so pessimistic right? I worked so long, I can tell you from experience, it is all a roller coaster, it goes up, it comes down, then it goes up again."
"Yes, that is the experience from the past. I'm just not sure it will continue."

"Aiyah. You just want to be negative lah? Ok, ok, let you be."

"It's not just being negative, there are signs - like even with all the ways the govt is trying to boost the economy, the economy has not wanted to be boosted. The US has been lowering interest rate until now it is practically zero, in order for businesses to invest in future growth, but... business are still very pessimistic."

"Businessmen also human. They tend to go with the flow. When everything slow, they won't go fast one! But when everybody starts to jump in, they also can't wait to jump in. Then things will get better again, lor!"

"Some economists are wondering if perhaps the system has run its course and this time it will be different."

"Aiyah. Economists and experts are all like that one. Every time there is a crash there will be someone to say, this time die liao. And everytime things get better again."

"Maybe it is because the system doesn't make sense and logically, it will burn out."

"You so clever, you explain to me why this time is different."

"It's not that this time is different. It's the same every time, but somehow we managed to save ourselves. But each time we save ourselves, we are only postponing the end. And it's economics, which is not always intuitively understood. In economics, sometimes we do something to help, but it ends up hurting Let's say you can produce a gadget and sell it to me for $10. We'll simplify this economy - you make one gadget a year, and sell it to me. And I will buy a new one from you every year, If we continue on, there will be NO economic growth - every year you make one gadget and sell it to me, and I buy it from you."

"Ok. So how?"

"So what happens is that the manufacturer, that is you, need to increase productivity. So you managed to produce TWO gadgets in the next year... which you are willing to sell me for $17."

"Good for you right? Save money!"

"Yes, but I only need 1."

"Can buy and keep lah!"

"Yes, which is how you convince me to buy TWO gadgets for $17. Use one, and one on stand-by in case anything happens to the first."

"Good decision!"

"Except that you continue to improve your production and productivity, while reducing your costs, and next year, you offer me two for $12! I say, I still have the second one I bought last year. But you are desperate to sell me, and tell me that if I buy 2 at $12, you will give me one FREE."

"Wah! Good deal hor? I a very good salesman. So you buy or not?"

"Well, after you explain that 3 for $12 is your break even price but you need the volume in order to get economies of scale, I buy 3 gadgets for $12 even though I don't need any of them."

"But good to have spare right?"

"Yes, so I have 3 spare gadgets, which should last me 3 years, Except the next year, you have another increase in productivity and offer to sell me 3 gadgets for $10! I say I already have 3 spare."

"Two. You would have started to use one."

"I see you are paying attention. but still, I have enough to last me 3 years. so should I buy another 3?"

"Because it's cheap! And this will lower your costs, so you can charge lesser for whatever you are selling."

"Except that I will be charging lower prices on the assumption that I will still be able to make and sell whatever product for the next 3 years. That is simply an act of faith. I have no guarantee that I can continue to do business for the next 3 years!"

"Aiyah! You worry too much! Ai piah jia ae aiah! Or as you say, 'Nothing Ventured, Nothing Gained!'"

"The point is that a lot of our economic growth is about selling tomorrow today. In fact, that seems to be the implied 'business model' of Capitalism. We encourage over-consumption, Literally. We upsize our meals.  And people get fat. We buy flats bigger than what we need - for our future needs. We are buying for tomorrow."

"That is just being smart, what?"

"Yes. To a point. But as we buy for tomorrow today, what do we buy tomorrow? Tomorrow's tomorrow? And so producers come up with 'planned obsolescence". The mobile phone you buy today has a battery that will be unusable in 2 years time, so you need to buy a new phone in 2 years. That is how the market has to adapt to continue to survive. And this may work for awhile, but this is the problem with economics and the economy. There is infinite wants, but needs are finite. You need about 2000 calories a day. But if there is more food you can eat a little more today, just in case there is less food tomorrow. But what happens when you eat 3000 calories of food everyday for a year? You'll put on weight. You get fat, obese even. Then you cannot eat anymore, Or you don't want to. Or you die. This is the flaw in the current Economic model - it requires continuous consumption to drive the economy. It is why we recognise the problem as "consumerism".

"Wah Liao! Your explanation dem cheem one man!"

"Basically, the consumer economy that is Capitalism requires us to be consumers. There is a story or joke that Henry Ford (Ford Motor Company) was watching an automated assembly line and he elbowed the Trade Unionist and said, 'look at all those robots. Try making union members out of them.'
And the trade unionist shot back, 'good luck trying to sell them your cars.'
The point is, capitalism needs consumption to fuel it. If you stop consuming, demand falls, prices falls, profit dries up, production slows and maybe even stops, and workers lose their jobs, and in turn cut their consumption even more. Capitalism when it works is a virtuous cycle. When it doesn't, it crashes."

"So... what?"

"There are signs that things are not going to be business as usual. We may need a new way of doing business. How? I don't know."

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