ECONOMICS IS MORE ABOUT PSYCHOLOGY THAN ACCOUNTING
Economics is more about psychology than accounting because in a time of crisis money isn’t worth anything.
If you take the scenario of you walking down the street and you get stopped by a would-be assailant holding a knife. The assailant says, “Hand over your money and anything else of value!” Do you do a spreadsheet on the computer you are carrying to work out the capital loss if you run and you can outrun the assailant? Getting caught anyway, losing whatever valuables you are carrying anyway? If you can fight you beat them up and detain them while waiting for the authorities to arrive. Better for yourself, better for society and possibly better for the assailant so they can get some help as to why they’re doing this in the first place.
Just say if you don’t think you can beat them up, disarm them and turn the situation on its head. Getting away with your computer, the gold jewellery you’re wearing, whatever money you’re carrying and quite possibly your life is a better option?
No! You’re better of dumping everything because it will just weigh you down as you try to run away. If you can’t outrun the assailant then at least if it’s just your valuables the assailant wants they’ll be distracted and not try to catch you at all. So perhaps if you had no valuables at all the assailant wouldn’t have targetted you in the first place.
What if the assailant wasn’t really interested in your valuables in the first place, knifing people was their hobby that they enjoyed on their days off and weekends. Under the pretence of robbing you, they can stop you in the street and distract you from their real intentions? You’d still be better of throwing the computer at them, which might buy you valuable time in running away. So here we have increasing variables in the equation as to why psychology is more important than accounting.
To add to those variables the assailant might have just wanted your gold, money and possibly your computer. So you hand over your gold, computer and money case that contains your money. Being a reasonable person they take your gold, computer and money, giving back the money case with your personal details inside. A win, win situation!
You could negotiate with them over the computer but as we have previously established it might not be your valuables that are the only thing on their agenda. This is why I say, money has no value in a crisis.
So in this microenvironment, these principles are true. So are they true in the macro and global arenas of economics! Money has no value in a crisis.
Say the reason you were so tightly holding onto the computer was that you are running a business. All your business details, contacts, strategic data, market analysis and communications are on that computer and you haven’t done a backup lately. Say you are in the produce sector and you have a chicken coup with three chickens that lay three eggs per day each. You sell them to the local neighbourhood and occasionally take your work home with you. So you’re set for life.
But, chickens being what they are, one chicken dies. Production decreases by two thirds because chickens need three chickens to effectively run a stable chicken community. Chickens being what they are they need to establish a pecking order. Three chickens can have a pecking order, 1 2 3. Two chickens just peck each other. Not a stable community. Production down, less cash flow and you need another chicken.
Neighbours, being what they are, come over to buy eggs and all of a sudden they wonder why the cost of an egg has gone up. You tell them, supply and demand and to add some reasoning to the equation you tell them you need to upgrade your facility by investing in another chicken. Your neighbour looks at your facility and sees the problem and offers you a $6 loan to buy a chicken, saying, “Can you pay it back by the end of the month and throw a couple of eggs in too?” You say, “Great, thanks for helping me out!”
You get your chicken, it’s settling in and you haven’t lowered the cost of the eggs, despite production going to normal, because the neighbours are used to the new normal.
In the meantime, your neighbour has seen your setup and decided to invest heavily in the same line as you, competition. Only the neighbour’s strategy has a strategic advantage over yours, four chickens – diabolical! A price war begins with the neighbour having the upper hand because if one chicken dies they still have a producing community. Whereas if you have a chicken die, having experienced this, production declines by two thirds. Possibly wiping you out of the market as you lose customers because of issues of supply and demand. Cash flow problems and the neighbour probably won’t lend you $6 to buy another chicken because it’s not in their best interest.
You think about the ramifications and since it has happened before you know it is a possibility. You could steel a chicken, the neighbours have got some, surely they wouldn’t notice one missing? You might be able to find another neighbour that will lend you $6 for a replacement chicken? You can save now for the future but there is a price war on and margins have gotten tighter, less profit available? Or you could form a cartel with your neighbour to fix the price of an egg? But cartels are illegal! You don’t know what to do.
Troubling over the situation you look for somebody knowledgeable that knows the industry better than you. Somebody you can get good advice from based on experience. Somebody that you can trust. Who could they be?
Your neighbour of course. You’ve lived next to them for years, they have knowledge of the industry, they have one more chicken than you. Most importantly you know you can’t trust them and so you can trust in that.
You swallow your pride as well as drop your grudge and go over for a friendly on the topic of the philosophy to the egg-laying community. You may say, “All chickens are equal but some are more equal than others.” To which they say, “Hmm, yes I know.” They may retort, “If a chicken went into a forest and laid an egg and nobody saw, did it lay an egg?” To which you say, “Mind-blowing stuff!” They say, “If I think therefore I am, what happens to a chicken if it doesn’t think?” You reply, “Hmm, ponderous…”
You might like to mention the concept of what would happen if all the global egg-laying industries were to charge the same amount, $6 per half dozen? What would happen to the industry in a local context? Also, adding the concept of labeling free-range to all their packaging? To which they reply, “Ponderous…” Bidding farewell and satisfied that you have repaired a deep wound with your neighbour you realise things aren’t so bad.
By some strange coincidence of fate, karma or an act of God the next week, on the same day, your neighbour and you are selling eggs for $6 per half dozen. Your packaging is nearly identical, indicating your eggs are free-range. You don’t understand how that could happen? It’s like you read each other’s minds!
Things develop and business is doing well, you decide to expand production to 1,000 chickens. You go to your local bank manager and ask for a business loan. You have a business plan ready with financial projections for three years. Financial projections based on a best guess, with subsequent more inaccurate best guesses based on the first best guess. A further even more inaccurate best guess based on the second best guesses based on the first best guess. What you have is a plan that makes no sense and the bank manager knows this before anybody walks into the office with a business plan. So why make the plan?
They want to see how probable your inaccuracies are, not whether they’re inaccurate because they already know this …and what your character is in assessing the reality of the business environment, risk. Bankers are pretty good with risk, hedging their risk is how they prosper.
Banks are not a community service, they’re a business. Like any other business, they operate for a profit. The less likely it is for them to get their money back, the less likely it is for you to get a loan. The less likely it is for them to get their money back the worse the terms and conditions on your loan, if they give you a loan at all. Banks are in the business of money, what kind of business knows more about money than a business in the business of money.
Banks can sustain a loss like you can sustain the loss of a chicken but if you consistently sustain a loss, given time, you’re not going to be in business for very long. Bankers factor in risk but won’t take a risk that quite possibly undermines the entire security of the bank. Based on the already established assumption that in a worst-case scenario, money has no value in a crisis, banks consider this in the equation.
So you get your loan, only it’s for 100 chickens and security on your house and land. You’ve developed a relationship with the bank manager, learnt something about business planning and loans. You’ve proven you can successfully manage a micro-business, which is the basis of your loan. If you had shown you couldn’t manage a micro-business then the manager wouldn’t have given you a loan, if only to prove you can’t run a bigger business either.
The key thing you have shown to the bank manager is your acumen to assess the realities of the business environment, i.e., risk and perspective. By the nature of developing a relationship with the bank manager, next time you may be able to access a bigger loan for 500 chickens.
You set up a new coup, buy some more chickens and feed, putting it in your backyard because you have a big backyard. Selling to the local shops and supermarkets. You might like to buy an SUV to deliver the eggs and now, partner and kid can use it to drive to school too.
Business is going well so you go back to the bank manager for a loan for 500 chickens and based on the fact you can run an egg production facility and pay back a loan. You’ve already developed a business plan with what you already know to be wrong projections. Based on knowing the projections are wrong your projections are more likely to be closer than before. Already having a good relationship with the bank manager they already understand your psychological makeup. Thus assessing the situation they can give you a loan for up to 1,000 chickens at more reasonable terms and conditions. The banker being more confident in their position, you take the opportunity.
So you build your empire, bit by bit. Cornering the market in your territory and state. You know have a small fleet of trucks and a largish chicken coup and production facility. Your wife has left you but at least you have three children and you’ve upgraded the SUV to an old BMW.
What next? 100,000 chickens, all laying eggs and producing product for the nation. Suitable logistics and facilities to match supply and demand. Going to the bank and repeating the previous procedure with better and better projections.
Next time you go into the bank the manager just says, “How much?” Draws up the contract, which you sign and you’ve got one of the biggest chicken coups in Australia. An oligopoly.
But now you want something bigger, a monopoly of the national market and eventual global domination as well as a black Porsche to match your midlife crisis.
You need a bigger bank. So you go to the Fluffy Cuddly Bank of the World and ask for a loan. Same shit, different shoes. You get the loan and you’re away.
Now you want to diversify to create company security and economic stability should something like a chicken flue strike the world markets. Chicken flue wiping out your business and causing a potentially difficult road to recovery. You consider quail eggs, duck eggs and easter eggs but you settle on nanotechnology robots. Back to the bank.
The banker has no idea what you’re talking about but you’ve got a relationship as well as a proven track record. While it’s a high risk the banker is willing to make you a loan under the right terms and conditions. You agree…
Suddenly you’re a leading engineering and technology company as well as chicken egg producer in the world.
You move to Switzerland and exchange the old, now classic-historic, BMW and black Porsche for an upgrade. Your main drive being a bronze Maserati Quattroporte, a four seated powerhouse of Italian engineering. Four seats, just in case your kids ever drop in or your imaginary friends have time for you, as well as your third wife. You have a small fleet of classic and contemporary cars that are in different colours, your new wife likes her car to match her lipstick.
In summer you reside on the banks of Lake Geneva, sipping a local drink made from juniper berries combined with tonic water, ice and a slither of lime. You’re secure in the knowledge that you are in one of the greatest tax havens in the world.
What next, a Villa in Spain perhaps, an island off Vanuatu or even a Chalette in Sun Valley Idaho as well …and then global domination! I wonder what the terms and conditions are for a loan on that one?