Monday, July 14, 2008

The Porsche Economy - Part I

Quote of the week:
'My advice to individual investors? Invest in some popcorn, because the next six months will be something to watch'. - Spengler speaks about problems in the banking sector (

Commentary of the week:

What is an 'Economy'? (Part I):

A young person whose intelligence and knowledge I respect quite a bit admitted to me on Friday that she knew nothing about economics and finance. As this young person will probably grow to be the President of the World Bank one day, I have taken it upon myself to ensure that something of economics and finance penetrates the consciousness of young people (and those who are young at heart) before they begin to make up for themselves a definitive picture of how the world really works. After all, it is never too early to fill young minds with economic propaganda - there was Adam Smith (who is rumoured to have been a bestseller in Victorian high schools), there was David Ricardo, there was Karl Marx, now there is Ittihad.

As such, today we begin to define what people really mean when they speak about an 'Economy'. As your humble correspondent lives and breathes this stuff, I sometimes forget that people actually have real lives and don't always know (or care) exactly what pseudo-experts like me are saying when we propound our theories on 'what must be done' to the economy. Usually, the lens through which we look at the world is not economic, but rather has a political, social or justice bent. This is usually because many people do not actually study Economics as a subject and choose instead to become doctors, lawyers, engineers, professors and all manner of other (I feel like adding 'useless' here but that would be too much of a blow to people's self-esteem) things that allow them to contribute to society in great ways but leaves them generally clueless about the gravity of our economic situation.

So here is my half-page summary of everything you need to know about an economy to impress your spouse into a stunned silence with your considerable grasp on why exactly you were laid off and cannot meet the mortgage due at the end of the month (go bi-weekly - you will save money) because you bought too much Kawartha Dairy Ice Cream with your inadequate severance package in order to make yourself feel better about the injustice of it all. After all, heating up the divine Biryani you brought with you (because a Subway sandwich is too bland) in the corporate head office is not an objectionable offence in Canada and there must have been a deeper economic factor working against you.

The economy then, is simply a construct that economists have made up to help make sense (or nonsense) of the actual Economy (read this as many times as it takes). It is a concept that has some basis in reality of course, but seeks to describe a complex web of commercial relationships by reducing them to simpler factors. Each economy is made up of these factors, much like a cake is made up of certain simpler ingredients. These factors (and there is some disagreement but not much) are 1. Land, 2. Capital, 3. Labour, 4. Technology. These inputs combine to produce what is called 'Wealth', which is measured in monetary terms ($'s) and is also called GDP and / or GNP by those inclined towards pretence at expertise.

The first factor - Land, is obviously a no-brainer. Without land, we would all be fish and there would be no Ittihad Weekly Briefing over email. I would still probably broadcast through sonar waves, but God knows best. Also, there would be no agriculture, no food, and no oil. Even if we were able to live without food, we wouldn't be able to drive our SUV's and Mini-Vans because they would sink and that is just plain wrong and does not bear thinking about. The second factor, Capital, is a bit more complex. This factor includes money (and finance) and the capital stock of factories / machinery / infrastructure / resources etc. available to an economy at any given moment. When people speak about investing in order to create jobs, this is what they mean - creating factories and companies with infrastructure in order to staff them with minions such as yours truly. Capital also includes the financial infrastructure that moves money between people who have it and the people who need it (perhaps this should be a commentary topic on its own). The third factor, Labour, is where you and I come in. We come to work, are given a computer (which is capital, not technology), we type away and create something of value (unless its spam) and thereby grow the economy. People better than us do better things - some actually make beautiful things like architecture and some do the noblest thing of all and teach beautiful ideas. There are of course, other more complex and elegant theories of how labour is really the one factor that brings dignity to others, but this is neither the time nor the space. Lastly, we come to Technology - which does not include the latest computers or gadgets we use to strategically interrupt our Friday prayers. Technology in the economic sense is the way in which the other 3 factors combine in order to produce Wealth. In this way, two economies with the same amount of land, capital (including gadgets) and labour can still produce different amounts of wealth because of a more effective combination - better technology.

To complete the lesson, we should also speak a bit about measuring an economy. The only universally accepted measure of an economy at the moment is the amount of wealth it produces on an annual basis using the factors we have discussed. This wealth includes all manner of commercial transactions but little else. On a planet that is cut up into little (and big) countries, we are all just competing with each other to produce (read consume because they are the same) more stuff. As the field of economics simplifies life for us, it also simplifies us into one-dimensional people. Of course, this does not mean that we all move to the Yukon and live off the land (I have heard that there is an economy there as well). It just means that we should sometimes reflect a bit and not take at face value the demands put on us as people to produce and consume in this value-less way. But alas, we are all in the same boat here, and the fiction that all of us should and can have a red Porsche if we just try hard enough is just too persuasive. Since smarter people than me came up with this system, I am convinced. Are you?

Upcoming Events:



Finance News:

1. Almost makes you wish short-selling was allowed in Islamic Finance (almost) ... read more here

2. The next time someone tells you the stock market is the place to be in order to stay ahead of inflation, quote the Economist ... read more here

3. This is too funny. First, the Fed puts $100's of Billions into the Asset Backed Security (ABS) market. Then they help JP Morgan buy Bear Stearns and put the support of a main street bank behind a wall street company. Then they move assets off Bear Stearns' books. After that they themselves value the assets and declare that there has been no loss. So much fun playing when you are the striker, the goalie and the referee all in one isn't it?! ... read more here

4. Warren Buffett losing money?! ... must be propaganda ... read more here

5. The continuing saga of the $52B Bell Canada buyout ... read more here

Economic News:

1. The price of economic progress in Kenya and social progress in Florida ... read more here

2. How the slowdown in the housing sector affects the Economy (a nifty chart) ... read more here

Islamic / Middle East / Emerging Markets:

1. N / A

Interesting but not all Finance:

1. Want to lock in your gas price for the year? ... read more here

2. What does it really mean to be green? ... read more here

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