In Gazi Antep I’ve met up with Mehmet, who since I contacted him from Istanbul has been putting me in touch with people left right and centre that have been able to supply me with oil. At last we meet and he’s younger than I expected, and has all the energy and connections you’d expect of a young entrepreneur. He walks quickly and talks even quicker on his phone.
He’s lived in London for a while and has some great memories of working and studying there. Later today he’s going to take me to their oil stocking warehouse. They have a biodiesel production plant but because of the taxation, it’s not economically viable to produce fuel officially.
I’ve also met up with Manfred (www.thisfabtrek.com), a retired Austrian currency trader dropped out from a great height and now lives in a bus and travels very slowly in whatever direction the moment takes him.
We first met about 5 years in Senegal and then by accident and by design we’ve met again and again in London, Mali and now Gazi Antep. He reminds me of Dennis Hopped in Apocalypse Now, and I love how incongruous his professional camera and his Rolex are against the backdrop of his ratty bus and the look of a man who hasn’t washed in a week.
We talk about how the Credit Crisis doesn’t seem to be affecting Gazi Antep which has a prosperous feel despite it being the first town where I’ve seen beggars on the streets.
I once worked for a famous investment banker, Jim Rogers, who specialised in profiting/profiteering from emerging markets. He drove around the world and employed me to be his “Africa Hand”. I quit after 3 months and the whole experience is now consigned to a surreal set of memories under the heading “Africa on £2000/day”. Along the way he would look at local economies and invest in ones he thought were on the verge of breaking through into fully signed up open capitalist markets and consequently a short spurt of exponential growth.
The only place he really invested in while I was with him in West Africa was Ivory Coast, and I took some churlish satisfaction when a few months later it proved to be a flawed investment as the fragile stability broke down and wiped out any prospect of their stock market growing.
Jim’s approach is that the ingrained objective of every individual and organisation to maximise their own profit, when allowed to flourish in a true unhindered market capitalism, and is the answer to every problem, from development to international trade, but I think Africa was a good lesson for the Jim, in that when people have nothing, it’s very hard to take the long term view and that creates a different set of behaviours than you’d expect from the “rational” investor.
With some distance, I can now say it was certainly a good experience for me despite the personal differences. I’m very attuned to the state of development of the economy in countries I visit and how that impacts on the day to day experience of people’s lives. Manfred is a massive fan of Jim’s and we always end up talking about him when we meet up.
My view is that capitalism when unfettered ultimately results in anarchy, where the market allows you to buy security or brute force. We saw this in action in DRC during the elections. If you have money you can pay the police to exact whatever you decide is fair. Russia is another classic example of market capitalism meeting anarchy. On that basis you need some rules, but where and how you regulate results in the one type of failing or another in this economic-survival-of-the-fittest ideology.
But worse, the fact that growth is intrinsic to capitalism makes it unsustainable. There are finite resources on the planet, the only reason they are worth more each year, is because we are using them up and there are more people fighting for access to them.
The market value of a company, currency or commodity is not based on its perceived value, but on how people think other market players will perceive its value. So it’s not connected to the reality of a how well a business is run and managed, and in fact businesses have to play the game, sacrificing good projects to manipulate how their finances are perceived so they can raise funds on the market and function.
Markets don’t create worth, they just move it around. Unlike manufacturing which takes raw materials and processes them to create products that have a value beyond the sum of the materials and the work. That’s wealth creation. The market a closed system with rules which means one person’s gain is another’s loss. But over the last 30 years it’s become impossible to be a functioning member of society without buying in that market, (mortgages, pensions, savings accounts) and like a slow burning pyramid scheme, it’s growth is based on more and more people buying in, and when it goes tits up, it’s the last to arrive that loose the most.
The massive profits generated over the last 10 years by the city, are being paid for over the next 10 years by people stuck in negative equity, with savings in failed banks, and by taxes to fund the bail outs. And yet we are all supplicant to the idea that we must get the market back on its feet for us to return to that prosperity and happiness.
I was at the anti-capitalist march when the G20 rolled into London (one of my first blogs I think). Not just anti-capitalist, it seemed to be anti-everything, and I was really disaffected by the lack of positive ideas and alternatives, but a long distance cyclist I met in Ulu Deniz on his way to Africa introduced me to the idea of social enterprise (I think that was the term he used). The idea is that businesses can be set up with a primary aim other than to maximise profits, for instance to employ the most people possible. Traditionally this is the role of NGOs but perhaps there is a role for a middle ground between NGOs and commercial enterprise.
“Work” is effectively the exchange rate between time and money in your life. If you have a well paid job, then you get a good exchange rate for your time. If you have modest ambitions then you don’t need to change much of your time into money. If you’re born in the developing world you’re unlikely to ever be able to get a good exchange rate. When the market falls, people lose money but really it’s their time and their lives which are being used up.
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Great post Andy. I disagree that markets are a zero-sum game. The fact that we have recently had dysfunctional markets in many areas recently (the stockmarket, the housing bubble, etc) does not in itself invalidate the concept of a market in general. It could be argued that many of the recent market failures are the fault of government intervention (e.g. Greenspan trying to prevent a recession after the dot-com bust leading to unreasonably low interest rates and the housing bubble; governments thinking that investment banks are too big to fail leading to moral hazard for bankers, etc).
ReplyDeleteAnyway, fundamentally markets allow for economic exchanges that are valuable to both sides. Say I have grown 100kg of tomatoes over the summer. My neighbour has grown 100kg of apples. We both need food for the winter, but you can't just live on only tomatoes or only apples. So you exchange some with your neighbour, you both make it through the winter, value has been created (for both of you) because you are now alive not dead.
Say that it's harder to grow apples than tomatoes, or that you need more than just two fruit to live on. Who decides the value of the different goods? If there are lots of people growing both, going to a (physical) market to exchange goods, then the (physical) market will decide what a fair value for these goods are. The alternative is some government or higher body imposes a value, and that's what leads to butter mountains, milk lakes, and Soviet-style shortages.
In the above example, for the market to be a zero sum game, some value must have been destroyed. Where has the value been destroyed?
Even stockmarkets provide value, in the availability of liquidity and the reduction of risk. If I have $1,000 in savings, and I wanted to invest it in a business growing tomatoes, and there was no way to buy a share of someone else's tomato growing business, I would have to spend the $1,000 to set up as a tomato grower myself. All my savings are now in one business, which is a concentration of risk, and I can't get out of that business without finding someone else to sell the whole business to.
With a stockmarket, you can (a) buy small shares in a number of different businesses, spreading your risk and (b) sell easily to someone else if you need that money back. There is significant value in both reducing the risk and increasing the liquidity of the investment. Nobody has lost any value, so it's not a zero-sum game.
Feel free to argue!
Thanks Mike, and congratulations on your MBA distinction this week. Well deserved. Sounds like your new job is really exciting too but if it doesn't work out then I've got some thoughts on your apple growing business.
ReplyDeleteI still say that the value creation happens when you grow your apples, rather than when you swap them for tomatoes, although you're absolutely right that to realise that value you need someone willing to buy your apples, and markets bring buyers and sellers together, an infrastructure which provides a useful service for you.
But its one of many important services that you will need when you make a living from apples, like fertiliser supply or a cart and horse. Crediting the market with wealth creation is no more valid than crediting the horse.
Financial markets provide capital to companies that need it to fund projects, but again I would argue the wealth creation happens in the companies (who unfortunately are beholden within the capitalist system to the need of liquidity), not in the market.
And of course as you say financial markets also provide valuable risk management options to people with capital, but again I'd argue that this doesn't actually create the wealth, just allows it to be managed.
I'm the first to admit that this concept requires a radical rethinking of how people and organisations can be empowered to undertake their dreams and projects without being dependent on the ability to raise finance. There are ways of doing that when you reset your goals of away from profit maximisation; like quality of life maximisation, or social equality maximisation, or happiness maximisation.
The Biotruck Expedition is a good example of a project that is enabled despite making no commercial sense. It's empowered purely by the goodwill of the people that have helped me (including you) and they are all "shareholders" in it. Interesting to compare that with Jim's travel strategy of being able to buy his way out of adversity.
I'd argue the horse does create wealth. Without the horse you can't get the apples to market, they rot in the field, you've wasted a summer's work, and you die of starvation that winter.
ReplyDeleteIf you can't raise the finance to buy that horse, because there's no capital market to raise it from, that's a real shame.
However altruism, social enterprise, and philanthropic goals, are not mutually incompatible with profit, ROI, and economic development. In my mind there is too much of an attitude that these are incompatible goals, that by espousing modern economic and financial theory you are automatically an enemy of development, sustainability and equality. There are ways these can be married for a win-win-win for investors, workers, and the environment.
Consider what Grameen have demonstrated with microfinance, enabling the poorest in society to raise themselves out of poverty, while still making money for investors. And by providing a sustainable business and regular income, these people no longer have to pillage the land for firewood, crops and so on to survive, therefore helping the environment.
It takes good management, good government, and good intentions to make these kind of programmes work. Unfortunately, all three are often lacking, leading to the desecration of the land, the pollution of the seas, and the exploitation of the people that we so often see.
Mike, Quick one, cos I'm in an internet cafe which is so thick with smoke I can't make out the no smoking sign on the wall.
ReplyDeletePerhaps Marx and Engles would be avid followers of this post if they were around today.
I totally agree with all you say on management/governance/intentions, but firstly markets are held in a higher esteem than horses (and other infrastructure business need to work), and I'd say in higher esteem than they deserve. They are part of the jigsaw puzzle, but I think there is a deferential attitude towards them (financial markets I'm talking about now) which distorts their power and influence, to the detriment of a sustainable society, and even sustainable business.
There are other more ways to get a horse than raising finance to buy one. I think business's should be more imaginative with resources when starting projects, but there is little to encourage them to do that with the stranglehold the market has on thinking.
Sure profit and altruism can be compatible goals, but I'd say that scenario is a joyous rarity, and even then there usually comes a point where the business leader has to make a choice between ROI or altruism. That moment is the framework which justifies powerful business leaders taking decisions which have a negative impact on us all.