Economics @ Home © Volume 1 Issue 16

Methods of Madness - Part 2

In Part 1, we talked about the first role of the Lean and Mean Machine, which is to publish a newsletter that serves as a public resource for the eager minds from all walks of life. To add further to the goal of the newsletter, if you refer to the panel on the right, you will see the following:

Your everyday dose of Economic thought conditioning that emphasizes accessibility, honesty and accountability. Economics @ Home seeks to address our everyday problems with brutal honesty that is aligned with a sense of humility with aspirations of achieving the greater good.

It may first appear to be fancy and extravagant, but I have revised the wording several times to make the vision as concise and accurate as possible. Economics @ Home is an avenue for thought conditioning, which means that it provides, sometimes unique view on issues to provoke thoughts and emotions that encourage us to see the bigger picture as well as think outside the box.

Furthermore, as you can see, Economics @ Home is meant to be accessible to any person who has sufficiently competent literacy. The views expressed here honest opinions, albeit sometimes controversial, but with no hidden agenda and I am willing to be held accountable for all the opinions expressed here.

But what is Economics @ Home about? All this talk about the greater good, but what does it really do? Well, as a human being, I can certainly say that I face myriads of problems every single day of my life. Some of these problems are more difficult to tackle than others. I also believe that some of the problems that I face happen to be very much in common with the problems that are faced by many other people.

So, armed with an economist's analytical mind, I hope to address these issues with logic, reason, and perhaps with some evidence in hopes of making other people's lives just a little bit better, even if it is through humor, rather than actual solutions. That said, with all the huff and puff about making the world a better place, I strive to maintain whatever ounce of humility I can muster so as to not suffer from any delusions of grandiose (pronounced gran-dua for those who seek to accumulate style points when speaking, or to impress your lady friends by sounding slightly more romantic by busting out a funky French word or two).

In closing, we have covered all the fuss about Economics @ Home and hopefully I have sufficiently enticed you to regularly revisit this site. If you are not yet convinced, don't worry, as there will be more sneak previews on the better things that will come in Volume 2 of Economics @ Home.

It will be an honor if you could share your ideas with me. For those of you who are a little bit shy to contribute, may you indulge me by clicking on the advertisement on the far right to keep this project sufficiently funded. You may say that so far, other than employing the abilities of the author, everything else is "free". In some ways that is true. Discounting the internet fees that I currently subsidize, there are many other projects that are simultaneously ongoing with the publishing of this newsletter which I will continue to elaborate on in the Part 3 of this series of my Methods of Madness.

Nonetheless, it is not the monetary issues that matter but every click will be a morale booster for me to keep churning out what I hope to be significantly novel ideas to discuss in future issues.

Economics @ Home © Volume 1 Issue 15

Methods of Madness – Part 1

I owe all you faithful readers a proper explanation for my lapse in regularity in publishing a supposedly weekly newsletter. While creating a timeline in our planning is important to help us prioritize, it is of even more immense necessity that we keep to the timeline.

Publishing a newsletter is a serious issue, and I assure you that I have never taken this lightly. It is with very deep regret that I have fallen behind and failed to keep my promises. Every week that I fail to publish Economics @ Home is a broken promise to myself and more importantly, to all my readers.

One of the obvious reasons or excuses that I can give you is because of the lack of time. Nonetheless, it is a common fact that everyone has 24 hours in a day (a very good approximation). So, how can I say I lack time when I have just as much time as everyone else on this planet? My failure was in my inability to use that time effectively towards publishing. While I had intense work commitments, I am fairly certain that there could have been circumstances that I could squeeze out a few hours to do my publishing.

So for that, I regret, but will stop short of an apology. The reason is that I believe apologies mean nothing when there is no actual remorse. It is not the case that I have no remorse. I strongly believe in walking the talk and thus, I will end this folly with my sincere expression of regret and move on to strive my hardest in making it up to all you readers.

I first start by explaining the role of the Lean and Mean Machine so that you can perhaps understand why this newsletter exists in the first place and why I will take it extremely seriously. The Lean and Mean Machine Pte Ltd was set up a few months ago with three main roles. The first and most prominent role, as of today, is to publish a newsletter that is fit for public consumption. The goals of the newsletter are:

[1] to create an awareness regarding the importance of economics in our everyday lives;
[2] to analyze everyday happenings from an economics standpoint to provide what are hopefully better solutions;
[3] to maximize the potential of everyone through the sharing of experiences and knowledge.

Then the next obvious question would be, why these goals? The first role of the Lean and Mean Machine is just a part of a grand scheme of objectives. The ultimate goal of the Lean and Mean Machine is to establish an educational institution that enables and assists people who are willing to try, to maximize their potential. You could call it, a university of life. This idea stems from my experience as an Asian student. This experience has led me through an educational journey that was focused heavily on academic concentration that was meant to help me find a comfortable, high-paying job, with good benefits.

While these are noble and well-meaning objectives, it is probably more relevant for societies of the past, when knowledge and information transfers at a much slower rate. In our world today, because information, knowledge and experience can be passed on rapidly, more opportunities are available for people to be successful. Because of the abundance of opportunities, people are less restricted by their social origin to be all they can be. Imagine, the social constrictions for a peasant in the 800 BC who wanted to be a court official. With limited access to books, internet and everything else that even a seven year-old has access to these days, how does one move up the social and economic ladder? Thus, with so many obstacles, obtaining a high-paying job with benefits would be like a dream come true.

However, that does not apply in the world today. Social and economic mobility is commonplace. We hear more and more rags to riches stories these days. Thus, it is the goal of the Lean and Mean Machine to perhaps be a tiny pebble in people’s building blocks in their path towards greatness. The great ambition of the Lean and Mean Machine is to start a university that inspires people towards maximizing their potential as human beings as opposed to your typical university that awards you a shiny piece of paper that certifies your specialty in the field of Arts, Sciences or whatever you trained yourself to be good at.

Thus, Economics @ Home is a a means to an end, rather, a modest vehicle at the starting point of a long journey of aspirations. Economics @ Home should be seen as a well of knowledge and experience for all students of life, hoping to contribute their part in making this world a better place.

This concludes Part 1 of the Lean and Mean Machines Methods of Madness. I will elaborate further on the other roles and functions as well as projects of the Lean and Mean Machine towards achieving this grand scheme.

Economics @ Home © Volume 1 Issue 14

Patience

Those of you who frequent this site should know two very obvious things. First, my posts have been less frequent of late. Second, the layout and the look has changed tremendously.

There are several reasons for this change. As 2009 is drawing to a close, I am looking to end Volume 1 of Economics @ Home. With the new year, Volume 2 will begin with, hopefully, a vengeance.

Also, I am testing out this new look for the new year. I will also be changing my site name to EconAtHome.blogspot.com. So far, nothing is ready yet. Please don't get overexcited. The reason for the name change is so that I don't mix business with pleasure. A Walk to Remember will be reverted back to its old use, which is for personal blogging.

Economics @ Home will start anew on 1 Jan 2010. Why the need for such a change? On one hand, many things have changed in my life, and changed significantly they have. I have been working on several other projects as well, and this will be discussed further on another more auspicious day. Nonetheless, with so much going on, I have found it much harder to post regularly.

I read somewhere that the reason for the lack of performance is usually not because of the lack of motivation. Usually, it is due to the inability to remove the obstacles that are in the way. 24 hours a day can sometimes be too little. But now, I have readjusted my path and hopefully I will be able to sidestep whatever obstacles that I was facing before.

Going forward, there may be a few changes to Economics @ Home other than the outlook and the volume number. What started out to be an ambitious weekly newsletter has proved to be somewhat unrealistic at this point in time with my work commitments. If the earning potential of Economics @ Home has the ability to keep me fed, there would be no doubt that I will focus more energy on it instead. However, this is clearly not the case, and so, my work commitments still come first. So, for 2010, I intend to reduce the frequency of the posts to once every fortnight, still on Sunday. This comes as a very difficult decision because my honour, pride, and everything good is at stake when I lower my standards for myself. Trust me, it is still my goal to produce a weekly newsletter. I am in the midst of searching for a part-time author to fill in the gaps when I run into time hurdles. If you are interested in applying for he co-author position, please drop a comment or your contact in my C-box and I will get back to you as soon as I can.

I also intend to continue updating the Lean and Mean Machine. To keep the long story short, the Lean and Mean Machine is still very much alive. It has been somewhat dormant for the past two months because its sole client, i.e. me, temporarily ceased to use the services of L&M, so there was zero monetary activity for the company.

There has also been no change in terms of the stock portfolio of the company. You can bet that I will release a full disclosure for the year ending 31 Dec 2009 by the end of January. Hopefully I can get it done sooner, but of course, I like my margins of safety.

So with that said, I urge you readers to stay patient, and look forward to the new issues of Economics @ Home in Volume 2. Remember that the site will change from 1 Jan 2010. You will only be able to access the old issues from the new site.

More sneak previews will be provided as I finalize some of the finer details of the launch of Volume 2. Until then, I thank you for your continued support and I hope that you continue to follow Economics @ Home.

Economics @ Home © Volume 1 Issue 13

More is Better

One of the most fundamental assumptions in micro-economics is that having more of a good is always better than less of it, of course assuming that the utility is positive. I mean, who would ever want more of a bad thing, unless they are sadistic or insane, which actually, to them, the utility may or may not be positive. Who knows?

Today, I hope to discuss how this theory of "more is better" is witnessed and applied in our everyday lives, and hopefully, attempt to understand why. One of the most glaring examples of people thinking "more is better" is the rampant occurences of affairs. It is not the case that people want more partners. While having many partners actually has the attractive notion of variety, the amount of trouble that one has to go through to keep one relationship or the other secret may actually offset that very benefit. So, why do people have affairs? How does this tie in to the concept of more is better, if it is not to have more partners?

I read an interesting theory once, that "Men are animals. We always want what we can't have." Wanting what we can't have is basically saying we always want more than what we have. Of course, here, "men" refers to mankind, which inclues both genders, and anything in between. I hope I did not leave out anyone. Herein lies the premise of why more is better.

First, let us think about the theory for a bit more. "We always want what we can't have". While this may seem like the important part of the quote, I beg to differ. I believe the first part is definitely a lot more important, and hence that is why I am saving it for last. The statement implies that when someone has an affair, there is something that they can't get from their current partner. While it is easy to imagine one to be sexually frustrated, believe it or not, there are actually other reasons that people have affairs. For example, it could be something as simple as the husband or wife feels unappreciated at home for everything that he or she does. It could be things like doing the dishes after dinner, taking out the trash, or simply listening to the other person complain on and on about how crazy their day is while having a super tough day on his/her own. The moment we feel unappreciated is the moment we are at our weakest. Usually the cruelty of fate always has a way of finding us when we are at our weakest. We tend to meet someone else whom we happen to make a connection with, and suddenly feel that someone actually understands, and feel somewhat appreciated again. Because of this moment of weakness, we succumb to these temptations of external affection and procede on to have what we term as an affair. All because we couldn't have what we used to have or want (and perhaps lost it, or was taken for granted).

As promised, we shall now discuss the first part of the quote. "Men are animals." Now, one might feel disgusted at being referred to as a beast of the animal kingdom. It is known that what separates us from animals is the ability to think rationally. What this means is the capability to give reason and justify our actions. Of course, being able to justify one's actions does not automatically give one the right to determine what is morally right or wrong. Nonetheless, it is sufficient to separate mankind from animals.

Such abilities usually come with huge responsibilities. The most important of these responsibilities is to use the ability and the next most important one would be to use it wisely. Going back to the topic of having an affair, we all know that animals have a great knack for following their instincts. The assertion that animals have no ability to think may be offensive to some people, so I shall not venture down that road. It suffices to say that most of the time, animals follow their instincts and these instincts usually tell them that more is better. It is built into the nature of animals to ensure survival of the species. So because of this instinct to acquire that which is not ours, men (or women) seek affairs. We seek in others what we cannot find in ourselves, and our partners, in this case. That is why people say, "Opposites attract". Thus, to animals, having affairs is OK. We never snigger at an animal that has multiple partners but we scowl at people who have affairs. What is the big difference?

We then come back to this notion of the ability to reason. Because we were given the ability to reason, we are able to evaluate the costs and benefits of our actions, and consequently, able to choose our actions. Believe it or not, we have the ability to choose whether to have an affair or not. This ability to choose allows us to practice self-restraint and to postpone immediate gratification for future gains. It allows us to tell ourselves that while an affair is all fun and good, in the long run, the benefits of an affair may not seem all that feasible. While more is certainly better in the short run, the outcome of our actions are not so clear when it comes to issues in the longer term.

So, the next time you are faced with an opportunity to acquire more of something, please exercize some of that reasoning capability so that you do not regret your animalistic urges.

Economics @ Home © Volume 1 Issue 12

Fear and success

These two concepts seem like complete opposites and normally, we would never even think of them as being related. However, in this issue, I would like to perhaps show you that they are a lot closer than you think.

Typically, fear is associated with negativity, and success, otherwise. That is why we tend to think of them as opposites. So to facilitate today's argument, let us first try to let our mind grasp what we can about this emotion called fear. As we know, emotions are matters of the heart, and is often a difficult concept for the mind to digest. Nonetheless, for any argument to be meaningful and hopefully rational, it should probably include contributions of the mind. Fear is an intuitive and familiar concept, so to give synonyms of fear would be totally unproductive. However, I will give an example of how fear is often thought to be the nemesis of success to provide some context to the issue.

The most common feelings of fear is in the form of fear of disappointment. Someone once told me that when one has very high expectations of oneself, it is inevitable to fear disappointment. So to avoid disappointment, one should therefore not try. Now, why is disappointment bad? Obviously I am not going to try to argue that disappointment is not a bad thing. However, one can easily imagine being of ripe age and sitting back and wondering if one could have lived life differently and perhaps achieved more. It would probably dawn upon you that you did not achieve what you set out to do and probably die disappointed.

While this is all sad and demoralizing, there is another way to think about this. Imagine that despite your fear of disappointment, you persevered long and hard and never gave up. Perhaps you might not have achieved what you set out to do. Nonetheless on your deathbed, there will be almost no room to think about "what if I tried harder, could I have achieved more?". This argument tends to suggest that we should put aside our fears and go forward with no abandon. This tends to give us a negative conotation to the feeling of fear.

I believe that it is actually quite the opposite. When we feel fear, it means is that we are close. Imagine studying for your final exam. You have spent hours and hours trying to wrap your mind around the dynamics of electron spin (How does one even tell if electrons are actually spinning?). Then days or hours before the exam, we have this feeling of nervousness and fear. What if we fail or don't do well? Ever wondered why we feel that way? One can easily cite the more obvious reason of the desire for success. Obviously everyone wants to do well. But we wonder how some of our friends keep so calm about the whole thing? We often feel envious of such people. We can't help but wonder, do they want to succeed less than we do? The answer is no. Who would want to fail? The cause of the difference in reaction is the difference in the amount we have invested in towards our pursuit of success. I would like to share a different line of thought that one can take. The reason we feel the fear of failure is because we have invested too much. We have studied for too long and too hard. It is as if we have already ran 9.75 miles of a 10 mile race. Would you give up if you were that close to success?

This is the exact same reason we see grown men cry on ESPN. I am talking about the likes of NFL linebackers, real macho men (as opposed to the pussies like Cristiano Ronaldo who cries about being given a love tap). The reason they feel this fear is because they are just that close to sucess.

So I hope that the next time you encounter any doubts towards your ability to achieve what you desire, remember how much you have invested. When you know how much you have put in, there is simply no turning back. They only way is forward. Let your fear drive you towards sucess.

Economics @ Home © Volume 1 Issue 11

Output and Growth - Part 4 (Final Part)

In the previous three issues, we have talked about the importance of output and growth, and underlined the two main ways to expand output, i.e. through increase in efficiency and growth of resources. In the last issue, we explored the detriments of leakages which sets a prelude to the goal of the final part of this series. In this issue, we will explore ways to grow our resource base on a macro and micro level.

As mentioned in the previous issue, the key to growth is savings because savings lead to investment, which consequently leads to growth in capacity. What do you think of when you think about "savings"? At the macro level, savings is basically derived from the realized government budget surplus at the end of each financial year. You can think of savings as a form of retained profits. Of course, the role of the government is not to maximize profits (that would actually defeat the purpose of having a government as a market regulator), the government is however responsible towards economic growth. While this may be achieved through growth in efficiency, the government is also responsible in incentivizing growth in capacity.

In the previous issue, I talked about investing in infrastructure and human capital. While all these are part of the budget, I feel that it is important to maintain a slight surplus for investment purposes to grow the government's "savings". Think of Singapore's Temasek Group, a specialized investment machine that has the sole purpose of growing the size of funds. As many wise men have aptly expounded, the goals of politics and economics will never converge in the short run, simply because politics focuses on the short term while economic growth is a long run goal. Nonetheless, this only stresses the importance of a stable government (which has been miraculously achieved by Singapore) so that it can focus on the long run of the nation without having to please the voters in the short run so that it gets reinstated at the next election.

I do however maintain that foreign exchange reserves are not classified as excess funds because these funds are usually invested in liquid assets because their purpose is for emergency usage. It is intuitive that we should save money for emergency purposes but any educated person should know that postponing current consumption for future gains is not an unfamiliar concept.

However, as I exhibited in the previous issue, dumping your funds in fixed deposits (FD) is merely a slow but sure way of getting poorer. Where else can we put our funds?

Although more and more people are becoming aware of investing their money in the stock market, many are still wary of its risks. People are afraid of the unknown and are even more lazy to learn about the stock market. I am not here to allay your fear of the stock market, but merely to explore some alternatives that might actually generate some real positive returns. I will tackle these investment vehicles in the order of least practical to the most practical in my own point of view. I take no responsibility for the performance of these investments because most of them require some amount of knowledge and skill as well as a lot of hard work. After all, there is no such thing as a free lunch. I cannot and will not advise anyone to just dump your money in any of these vehicles and hope that they generate luxurious returns because that is not possible and it is also illegal for me to induce purchases in some of these investments because I do not have an investment advisor license.

1. Fixed Deposits

I cannot mention enough how useless these instruments are in terms of growing your funds. The era of high interest rates are gone. With expected inflation to be low in the coming years, there is very little chance for interest rates to be scaled upwards. Even so, on average, fixed deposit interest rates merely track inflation over the long run. In fact, the yield spread could even be used as a predictor of expected inflation. That exemplifies how strong the correlation is. So, there is no way of beating inflation if you place your funds in fixed deposits. However, it is important to note that these investments are basically risk-free.

2. Amanah Saham Bonds (and other Amanah Saham stuff)

I feel these funds are more for entertainment value than for anything else. Even, the ones that guarantee 5% returns for the next however many years still have very little potential to beat inflation. Nonetheless, these instruments are slightly better than fixed deposits, which is why many people are willing to spend hours waiting in line at the banks to subscribe to these funds. An even funnier fund is the one that invests in equities. It promises to track the KLCI. There is almost no skill in that because any person with a trading account can basically allocate his funds equally throughout the KLCI counters and you would basically get the same performance, but without incurring management fees.

3. Property Investments

This one is pretty debatable. While it may generate potentially high returns, I feel it is not practical for beginner investors like you and me because of three reasons. First, its initial capital outlay is extremely high. The down payment to purchase property is very high, which may tie up our funds to invest in other opportunities as and when they emerge. Second, property investment is extremely illiquid. This ties in closely to the first reason because it is extremely difficult to dispose off these investments when we want to realize our gains or purchase other opportunities that we deem to be better. Third, in most cases, we have to incur guaranteed costs while our incoming cash flow is unpredictable. That is to say, we have to pay monthly instalments on our loan while we may have difficulty renting out the property, assuming that the property is already completed.

4. Unit Trusts (Equity funds, to be specific)

This category is huge. There are tons of different types of unit trusts. However, I will focus mainly on equity funds because the rest are just a combination of 1, 2 and equities. First of all, let me explain what a unit trust is. Basically, it is a collection of funds from investors with a particular set of investment objectives placed in the hands of a fund manager to invest according to those objectives. Equity funds is a unit trust fund that invests predominantly in equities (stocks, if you're unfamiliar with the term equities). One of the main attractions of equity funds is that the potential returns tend to be higher. Nonetheless, this is debatable because the performance of the fund greatly depends on the abilities of the fund manager. So, due diligence is still needed when selecting a fund to invest in. Like I have preached before, there's no such thing as a free lunch.

Why do I feel that this is more practical than the previous three investment vehicles? First, the concept of unit trust allows one to invest with very small capital. Minimum initial investments are around RM1000. Second, if we can find an able fund manager, we can ride on the "expertise" of the fund manager to obtain better than average returns. Typically, decent performing unit trusts average about 8% per annum in the long run. That is far higher than your long run FD rate. As to why the returns are so high, it is because the funds are invested in equities, which are companies listed in the stock market, which (hopefully) run a good business to churn a good profit that allows high returns on investments.

The drawback of unit trusts is, however, the management fees that you have to pay the fund manager. While this is not a fee that you have to fork out money and pay regularly, but it will be deducted from the fund based on the performance of the fund manager. Usually, this fee tends to be rather high. In addition to that, there is a commission that needs to be paid to the agents of unit trusts for marketing the unit trusts for the company. These fees can sometimes eat into the returns of our investments. Nonetheless, unit trusts tend to outperform plain deposits in the long run.

5. Equities

This is the most interesting and possibly the most promising investment vehicle of all. While diving into share investment without any knowledge is risky, knowing what you are doing reduces most of the riskiness involved. It is true that the risks of investments are there, but due diligence to ensure a high margin of safety minimizes the risks involved. Ben Graham, the guru of value investing said "Investing is most intelligent when it is most business-like". This sentence sums up what investing is all about.

Imagine yourself starting a business. Think of a list of criteria of how you want your business to be. These are the criteria that you should be looking for in the companies that you invest in. I do not condone speculation and will never do so. I am an advocate of value investing and the idea of value investing is simple. It is like paying RM5 for something that is worth RM10. If this does not attract you, then it will never attract you at all.

While the idea is simple, the work is hard. Most people would preach the risk-return trade-off in investing by saying that in search of higher returns, we must take more risks. This is totally untrue. What I know to be definitely true is that in search of higher returns, we must do more work. The key phrase of this issue is "due diligence".

I am in no position to teach anyone about value investing at this point. What I can suggest is to read widely regarding value investing. Books like "The Intelligent Investor" and "Security Analysis" by Benjamin Graham are vital. Think of reading as an investment in your personal growth. That is how you grow your personal resource base as well.

As a final note, you should note that one of the most important things in investing is that there is no formula for it. There is no one true way to grow your money. There are many ways to grow your resources. Some are able to grow it at a faster rate, some at a more conservative rate. One thing for sure is that nothing comes for free. Effort is essential.

After a possibly arduous journey over four issues, it is useful to go through the important things to take from this mini-series. We talked about what output is and the importance of maximizing output. We also talked about the two ways to maximize our output, via efficiency and growing our resource base. In this final issue, we explored the ways in which we can grow our personal resources. I would like to end by reiterating the recurring message throughout this series, which is "money does not grow on trees". So I urge you to invest in yourself if you seek to maximize our output and growth.

Economics @ Home © Volume 1 Issue 10

Output and Growth - Part 3

Dividing the topic of output and growth into several parts was not the initial intention. Ordinarily, I would have preferred to leave a topic to one part alone. However, as I began typing, I realized that there was actually more content than I thought. I also understand that it is difficult to finish a long article in one reading. In this third part, I will exhibit how leakages are detrimental to growth prospects of our resources at the macro and micro level.

Conventional economics suggest that growth comes from investment, and investment is a result of savings. Investment is a very broad term and the things that come to mind when we think about investment are things like stocks and capital expenditure. To be very specific, investment is the postponement of current consumption for future gains. A typical individual would save a portion of his income, usually in the bank and earn the interest offered on deposits until he needs the money. What began as perhaps RM1000 in savings could grow to RM1030 after a year with a 3% growth rate and RM1060.90 after two years. If he had not postpone his consumption, then he can only purchase up to RM1000 worth of products. The idea of growing resources seems easy enough.

People who have studied Keynesian theory would surely recognize that the multiplier of national income is a function of marginal propensity to save. The key here is to achieve maximum growth rate. Is 3% a high growth rate? Before we explore how to achieve high growth rates, we should first take a look at some examples of how growth can be achieved (or lost).

Malaysia was once known as one of the Asian Tiger economies. This is a very misleading statement. Upon a closer look at the underlying factors leading to growth in national income, we will realize that while it is true that our national income did grow at a rapid rate, we have failed terribly at growing our resources. As luck would have it, our country was bestowed riches in the form of natural resources. We are net exporters of crude oil, palm oil and rubber. As technology inevitably advances, we were able to harvest these resources more efficiently and in larger amounts. This has thus increased our national income or as we call it, output.

As mentioned before, growth is a function of investment. While Malaysia happily constructed mega projects all over the country and allowed its proceeds to "leak" through the system in terms of corruption and handouts, we forgot to save. Our country's meek attempts at investment included projects like the Multimedia Super Corridor and the poor excuse of an international airport that is in the middle of the jungle. Other excuses of investments include the billions of dollars spent on the Port Klang Free Zone (PKFZ) and attempts to increase the value-added-ness of our country's output.

I will just throw it out there that a country like India, which has one of the highest poverty rates in the world (at 50%), has a much larger network of fibre optics per square area than our country. While Malaysia has never stopped talking about high speed internet, our broadband champion, Streamyx, has yet to be able to provide consistent service even with its copper cables. When are we going to migrate to fibre optics and if we do, will it be just as inefficient? I wonder if such inefficiencies would have been minimized if there wasn't protectionism in the telecommunications industry.

While infrastructure is one way of investing, human capital is another great area to invest in. Singapore is a success story for human capital investment. Other than handouts to unqualified students, our government has also "invested" in the best technology for a select group of schools that were conveniently renamed as "smart schools". Brand new high-end computer equipment were bestowed upon these schools, funds were granted to construct labs to house these equipment and endless scholarships were awarded to the inadequate to study in these schools. When can we learn that there is no way that we can become world champions in golf, tennis or soccer by using Tiger Woods's clubs, Roger Federer's rackets, or Lionel Messi's boots in their respective sports? Giving a caveman a computer is not going to create an IT expert.

What's worse is that not only are the high-end equipment under-utilized, but they were also procured from "government contractors" who had to "bid" to supply these equipment to the schools. Of course the definition of bidding is debatable, especially in a country which refuses to keep up with the times in teaching English effectively. Goodness knows that these equipment were obtained at exorbitant prices that are way above the market price. A simple inquiry to any school will let you know that the schools are not allowed by the Ministry of Education to purchase computers from other contractors except the ones appointed by the government in the name of standardization. And I thought that the concept of buying wholesale would entail discounts that are derived from bargaining power. The obvious flaw in this system is the lack of competition.

These leakages are too common in the government bureaucracy. Not only have our resources been misallocated in terms of investment, but most of our savings are foregone via these leakages. Not only has our country failed to invest efficiently but also simply failed to save. Thus, that is why I say it is misleading to call Malaysia an Asian Tiger. We are perhaps a complacent sloth that failed to forage and store food for the winter. We have grown fat and content by exhibiting income growth without growing our resource base. We merely consumed more by producing more efficiently. How high can you build your tower if you do not build a wide base?

To apply these concepts at the micro-level, I will focus only on income for the time being. While saving our money in terms of fixed deposits (FD) is a sure way to grow income, it is probably obvious to you by now that 3% is meagre. Taking into account average expected inflation of 5%, your real returns from FD would be negative. FD is a sure way of getting poor slowly but surely. This is an example of fund misallocation.

In worse cases, we ourselves spend unnecessarily in unproductive goods and services and forego growth completely. Not all these expenditures are deliberate. Just this month, I spent RM200 on my examination fees and other smaller amounts for car-servicing etc. While these expenditures are "necessary", they function as leakages because I will not be able to invest them for future gains. The money is lost forever. Compounded at about 5% per annum, RM200 would become RM325 in just ten years, a growth of almost 63%.

While these leakages are unavoidable, we can choose to minimize those that are. For example, unnecessary shopping and fine dining. I am not forbidding myself from the occasional indulgence, but what I am saying is that skipping one or two of these expenditures per month can grow your resources quickly if invested in the right places.

As a final word, this issue of Economics @ Home dwelt upon the "do-nots" of saving and investing. What may seem like an unproductive activity is intended to create an awareness of the detriments of leakages. We often condemn the leakages that result from the government's misallocations, but also tend to overlook our own leakages. It is important to build a strong self-awareness when it comes to allocating our resources. Next week, as a conclusion, I will try to be more productive in exploring the possible ways in which we can grow our output/income more efficiently.

Economics @ Home © Volume 1 Issue 9

Output and Growth - Part 2

Last week, we discussed what output means for an economy and for an individual and also the importance of maximizing output. To recap, the output for an economy is a measure of income for all the participants in the economy, and I do not have to elaborate on the importance of income to you.

Things are a bit more complicated when it comes to estimating output for an individual. While the literal meaning of output implies that a product or a service that is provided, the value of the goods produced would seem intangible and difficult to estimate. However, it is sufficient to say that the salary paid to that person for his services is the value of his output, so says conventional economic theory.

Carrying this assumption with us, it is then obvious that not only do we want to maximize output, but also to grow the amount of output. There are two ways to grow output and I briefly touched one of the methods in last week's issue.

Efficiency is key to maximize output with a set of given resources. For an economy, its resources include money, natural resources, human capital and some other things that may or may not exist. It is easy to see that our country is far from being efficient. A quick look in any newspaper would make us sick to the bone with respect to how our hard-earned money is being wasted everyday. I am referring to taxpayers money that is spent on great big white elephants. I will spare you the torture of reliving the horrors of how our blood, sweat and tears are being wasted. Corruption is still rampant. Rent-seeking is the chief wealth-building activity of the rich bumiputeras in this country. To add to our pains, we are told that this is the evidence that the NEP is working.

Pointing out inefficiencies is easy. Explaining why these inefficiencies exist could even be entertaining, but most definitely unproductive. I will only get all emotional about how poorly the government is allocating resources. Keynes was right that in the short run, market failure is inevitable, thus justifying government intervention. In Malaysia, government intervention leads to poorer efficiencies than if we had let market forces steer our course with its possible failures. This part, Keynes was wrong. He assumed that all governments could allocate resources rationally and efficiently for the greater good. If only...

So to maintain my efficiency and not dwell on fruitless efforts, perhaps I can share some light on how we can improve efficiency and hope that someone who knows someone who knows someone will read this and shares it with someone who knows someone who might actually have the guts and intelligence to implement it. I say guts because some of the problems that need to be tackled are so deeply rooted within our society that any change would be severely unpopular and cost the government even more votes in future elections.

Anyone who has had a brief encounter with economics, even at the secondary school level can tell you that efficiency is derived from competition. Only one word, "competition". When we learn about perfectly competitive markets, we learn that every supplier in the market is a price taker. That is to say, the suppliers have no pricing power and can only sell their goods at the current market price. To put it in context, let us begin by examining students. If all students understood that there was no such thing as a free lunch, don't you think they would work hard? What is this free lunch that I am talking about? Well, for starters, easily available university entrance via matriculation courses and the quota system for scholarships for students who are immensely less deserving than others. If bumiputera students keep getting handouts, what is their incentive to become effective?

The buck doesn't stop there. When the students graduate from universities, because of the poor foundation that was caused by the handouts given by the government, they cannot find jobs in the private sector. So what does the government do with all the unqualified and unemployed graduates? Create jobs for them in the public sector. MORE handouts! This inevitably leads to the promotion of these graduates to decision-making positions and what happens when someone unqualified is placed in a position of power? Well, if you can't decide what is good or bad, what do you do? Pick one that you think works out the best for yourself. So what is best for the decision-maker is how much money he can pocket through whatever he has to decide on.

So now, some of the good and beneficial projects do not get approved because some unqualified jackass was given a place in university and subsequently a decision-making job only knows how to evaluate project based on how much rent he is going to receive for approving the project.

In short, not all the best students are given the necessary support, not all the best graduates are trained to do the important jobs that require making tough decisions and not all the best ideas are utilized. This is clear evidence of sheer inefficiency. Competitive markets will leave no room for pretenders. If you do not have the best abilities, services, ideas, products, or grades, you are redundant and will be subsequently substituted. Competition is an automated system to encourage effectiveness.

Extrapolating the idea of perfectly competitive markets to the individual at a micro-level entails the same conclusions. However, advocating this dog-eat-dog culture surely isn't perfect. This is where Keynes comes in. Markets do fail in the short run. Competing for oneself sometimes ignores the bigger picture of positive and negative externalities. This is why Keynes calls for government intervention. Or else, who would build the roads and the street lamps? Education would be extremely costly. Smoking and drinking would be rampant without regulation. Is that what we want? So of course, competition has to include common sense, bearing in mind the greater good. This is how effectiveness is achieved, building on each others' achievements to climb greater heights.

Next week, I will deal with the other factor of output growth, which is via growing our resources. Briefly, output is a product of resources and efficiency. While we have dealt with how to improve efficiency, so we will move on to the less intuitive idea of growing resources in order to multiply output growth. In short, we hope to build a bigger base so that we can build higher. We will explore how we can widen our base next week.

Economics @ Home © Volume 1 Issue 8

Output and Growth - Part 1

Output and economic growth is one of the longest standing issues in economics. The two innocent concepts seem simple enough. The words mean exactly what you think they mean, or is it? While we can grasp their English meanings intuitively, I would like to formalize our thinking about output and growth and explain why these concepts are important to us in a macro and more importantly, in a micro scale.

In conventional economics, output is usually related to Gross Domestic Product (GDP), or some other derived variant like real GDP, real GDP per capita, GNI, PPP-adjusted GDP and the list goes on. I am not going to go too much into detail on how these figures are calculated but it suffices to say that they are an estimate of how much goods (and services) are produced by an economy. It can also measure the income of an economy as people get paid for what they produce. This seems to make more sense and easier to grasp as a concept because it is somewhat difficult to quantify the value of certain goods and especially services produced.

Just with this definition alone, you can probably see why output is important to us. It is a measure of our income and last I checked, our income was our source of sustenance. Of course, we must remember that we are currently thinking about output in terms of a macro-economic scale. Knowing what output is seems innocent enough, but knowing how this output comes about is another monster altogether.

As I said, I will spare you the gore, but it is vital that I go through what is important when it comes to output. First of all, we have to agree that it is in our best interest to maximize output. It is all well and good to talk about how we should be environmental friendly and talk about conservation of resources but that only alludes to the point that I am getting to. Because of the goal of output maximizing, it is then vital to optimally allocate our resources. That is to say, minimize waste and maximize productive output with a predetermined allocated amount of resources. We must allocate our resources efficiently.

A simple comparison between Malaysia and Singapore will make the difference between the effectiveness of resources allocation glaring. In a previous issue of Economics @ Home, I explained that Singapore's national income per capita (a measure of output) has grown to more than triple that of Malaysia's within the span of 30 years. That was already assuming that both countries started with the same base. Why and how did this happen? Singapore's small size did help, but not because they had nowhere else to spend its money, but because it spent it in the right places. Singapore did not try to build the tallest buildings in the world. It wasn't enough for Malaysia to build one, but TWO tallest buildings, which are already forgotten. If only "Entrapment" was a super big hit. Maybe more people would have said, "Hey!!! Those are the twin towers!!". That was never to be, at least not in this parallel universe.

Going back to the point of resource allocation. If you looked at the export data of Malaysia and Singapore, you would be amazed that Singapore as a country exported more in terms of value compared to Malaysia. You must ask yourself, how does a small country that has nothing, export more than a country that has oil, palm oil, rubber and whatever else? Remember that we were once number ONE in the world for some of these products.

Of course the answer is a combination of 1001 reasons and things that the Singapore government did and the Malaysian government didn't do. Malaysians laugh at jokes made about the Singapore government. Very few Singaporeans laugh at jokes made about the Malaysian government simply because those jokes are not made up. They are true stories that are exceptionally hilarious! Just the other day, OC Phang of PKFZ fame said that she did not understand the term cash flow projection. So I went around asking 12-15 year-olds what they thought cash flow projection meant. All of them got the idea albeit not the exact definition correct.

While I am not going to go through the 1001 reasons that I mentioned, I will elaborate on a few important points. Singapore stressed on the importance of providing value-added services. Exporting raw materials and commodities have no value-added-ness. The price of these goods are determined by the world market. If crude oil is USD80 today, we can only sell it at USD80. By providing exclusive value-added services, we would have differentiated our products from the homogeneous commodities and thus give ourselves pricing power. Consequently, pricing power raises our export value and income. Now that I have said it, the idea seems trivial. Why do we not provide value-added service? To add value to any good and service, there has to be invention and innovation, which is a by-product of education. As long as our education system is filled with potholes and bumps, there is no way that Malaysia can be a champion of value-added-ness.

On a macro scale, output is a determinant of our income. While it is fun and games to talk about output on a macro scale, thinking about it seems boring because when we really examine the issue, it is hard to see how this affects us as individuals. So what if my country does well or not? All I have to do is to make sure I work hard or smart or however you want to work, and earn enough money for myself and my family and my noble goals. Why do I need to bother about output?

Perhaps the link from the individual to an economy is hard to see, as the performance of the economy is a mere aggregation of individual performances. Actually, the same concepts apply to the individual as well. In fact, this concept of maximizing output is so inherent in our everyday lives that we take it for granted. Even a 12 year-old can tell you that he wants the most bang for his buck, however unethical it is for a 12 year-old to be talking about obtaining banging for his buck.

We commonly think of material goods as resources. Day in and day out, we try to get the most value with our money. Although it may be common sense, I will still say it (because common sense is ever so uncommon these days): time is also another important resource. Everyone has 24 hours each day and it is only too cliched to say that we should make the best of the time that we have. We hear our parents tell us that all the time. While studying does give us good grades and perhaps a well-paying job, it probably isn't fun. So then, how do we really make the best of our time? Maybe I will attempt an article on this topic in a future issue.

Another important intangible resource is our mind. I have seen brilliant ideas go to waste simply because they were not put into action. My meek attempt at improving the output of my mind is to contribute a weekly newsletter that has a miniscule readership.

Going back to the main points, the idea of maximizing productive output is almost intuitive. I say this because we can always construct another bridge to nowhere or a building that is taller than the currently tallest building in the world and this would still contribute to national income. That is why the keyword here is "productive". If left completely to demand and supply, most of the goods that are produced would only be those that provide maximum utility. It is the role of the government to provide incentives for allocating resources to productive output.

What then, is productive output? To put it simply, they are products that can help generate growth. Growth not only allows us to produce more output in absolute terms, but ideally, it should allow us to produce more output with the same amount of resources that is to say, improve efficiency. I will talk more about growth, its importance, and perhaps attempt to figure out how to obtain it in the second part of this article next week. Until then, I wish that you can find the most bang for your buck.

Economics @ Home © Volume 1 Issue 7

Policonomic Ideals

Economists are not very creative people. I mean, they came up with terms like utility to mean satisfaction. I am about to continue that trend. While Political Economics relates to studies regarding the politics of economics; policonomics, I regard, as being related to the the economics of politics. The intertwining of terms may seem confusing and probably allude to the fact that I have created a new word just for the fun of it. But then again, if it isn't fun, why do it?

First of all, political economics is related to the decision making by authorities regarding the allocation of resources. Basically, it studies the the government's actions regarding the country's economic decisions. Without going too much into detail, political economics dwells on the role of the government in allocating resources in an economy.

What I will discuss today is probably not so different from that, rather, I will focus on the economics of the decisions of policymakers, more specifically,what are the policonomical ideals and how we may achieve them. Once again, I won't pretend to know how to run a country, but I think it suffices to have the ability to analyze the costs and benefits of an action or the outcomes of an action.

Anyone who has kept himself (without loss of generality in terms of gender) abreast with regards to the issues surrounding Malaysia will find it too easy to criticize the government and call for action or change or whatever it is. While many realize that the delapidated state of our country today is not a result of today's government but the leaders of the past and their mismanagement (to put it mildly) of the country, I find it disturbing because what these people are doing can be compared to blaming a son for his father's crimes. I will leave this topic at that and go back to what I intend to cover, that is what are our policonomic ideals and how we can achieve them.

I am not about to analyze every single policy in detail. I would like to focus on three key areas: education, healthcare and security. I chose these three specific areas simply because they tend to have positive externalities that extend the furthest. The benefits of developing these areas will naturally spillover to other areas and because of this, we can afford to assume that it is quite possibly the most efficient way to spend the people's money.

I touched a little bit on education in Volume 1 Issue 1. To recap, I asserted that the way to promote quality education was to significantly hike the salary of teachers and the trainers of teachers. This may seem absurd at first, but the idea behind it is rather simple. In fact, I recommend the policy of increasing wages significantly in these three key areas. Let us examine the effects on them one by one.

Of course, many people can argue that a sudden surge in pay of teachers is unwarranted and most definitely undeserving. Many teachers today are not only unable to teach science and mathematics in English, they sometimes impart the wrong facts to the students. I consider that a minor flaw. What is worse is that the students are taught the wrong attitude. Factual errors happen all the time and can be corrected by reading exposure. Teaching a student the wrong attitude is like baking a cookie with the wrong mould. Once its baked, it's almost impossible to reshape it. Because of this, it is clear that education is a vital sector to focus a country's efforts on.

We don't like to admit it but we all know that money is one of the greatest motivators. I am actually crazy enough to advocate a simple increase in the wages of teachers. As far as I understand, the government wages are paid based on the number of years people spend studying in university. So, doctors get paid more because they spend at least five years in university. Similarly, keeping teachers in university longer can only be beneficial. The standard of teachers today simply call for more training. Of course the teachers of teachers have to be competent as well. The best way to attract competent people into an industry is simply to offer attractive wages. The most obvious examples today are Real Madrid and Manchester City. The message is loud and clear: money is king!

Because of the increase in wages, more qualified (truly qualified, not just on paper) people will strive to become teachers. After all, being a teacher is a noble profession. No one is going to look down on someone because he is a teacher. The only reason bright students steer away from teaching and go into medicine, law and accounting is simply because of wages. I mean, seriously, why would anyone become a lawyer? The cause and effect is clear as the blue skies.

I don't need to elaborate the importance of healthcare. It is sufficient to note that better quality of living can only improve productivity and all the other nice things about any country.

As I said, the case is similar in healthcare. We all know how well-paid doctors are. However, doctors are not the only people who work in the healthcare industry. The often forgotten and unsung heroes, the biomedical scientists need to be given much better incentives. While the government has provided (or tried to provide) state of the art infrastructure everywhere, it fails to see that these facilities are clearly underutilized. Our country is great at boasting of having the most high tech corridor in the world and what not, but we forget to ask, what is the point of a corridor that no one uses?

Similarly, to attract great medical talents to Malaysia, our country must not be stingy on research grants to pull in the talents from all over Asia. Singapore is benefiting greatly from its generosity to sponsor research personnel. I am very certain that a stone's throw would be sufficient to pick out eager and talented researchers from China or India or some other "poor" country who can only cry about the lack of opportunities. Our selfish pea brains often ask, "Why invest in world class infrastructure and let foreigners use them?". First, it is obvious that giving an ordinary driver an F1 car is not only dangerous, but irresponsible. We simply do not have the expertise to fully utilize the infrastructure our government has strived to offer. Second, what our government always overlooks (or pretends to) are positive externalities. A simple question such as, "Why do we try to send our children overseas?" would lead us to the conclusion that we NEED foreign expertise. All this talk about how we MUST develop local talent and we choose to ignore the simple truth. Why not bring the foreign talents here? If Malaysia can establish itself as a healthcare hub of the world, the spill-over benefits for locals will be forgone conclusion.

Security is a very controversial issue in Malaysia. But I guess this is the case in every part of the world these days. I will not delve into the intricacies of the balance between regulation and freedom. Just like the indifference curve, there are many points on the balance that can provide the same amount of utility that can be derived from the security for a particular country. The issue is to maximize this utility. In this case, the cure happens to be the problem. Underpaying security personnel is like prescribing an incomplete schedule of antibiotics. Not only does the illness not go away, but in many cases, the bacteria become stronger.

Imagine yourself being a police officer who is underpaid. While it is all good and right to argue from the moral perspective but if your family or survival depended on money, would you not accept bribes if you could get away with it. Some people can even justify that it is only right.

There are three very strong benefits why increasing the wages of security personnel. First and similar to the previous two cases, we will get more competent personnel in the industry. It is only beneficial to have efficient workers in the police force. Imagine having bright detectives who solve crimes at unequalled success rates and police officers that are actually strong and brave enough to overpower the hoodlums that control our dark alleys. Will crime still be rampant in Malaysia? Second, paying security personnel high wages will force bribe offerers to up the ante as well. Imagine offering a bribe of RM50 to a police officer who earns RM10 000 per month. While money is still money, sometimes RM50 is not worth the risk. This brings us to our third point. By having high wages, the police will have too much to lose if they are caught receiving bribes. Now, their survival instinct will work in the people's favor. With a family to fend for, is wasting a perfectly noble and high paying job worth the risk? It is clear that the wage increase should not be limited only to the police force. I will leave how a wage increase can benefit the security industry as whole to your imagination.

Finally, I would like to reiterate why I chose to focus on these three areas. The positive externalities of having world class education, healthcare and security are practically unlimited. World class students bring world class brains and productivity across all industries. World class health care provides an enviable quality of life that will inevitably attract foreign investment. World class security and corruption standards entail the ease of conducting business in Malaysia. We often hear the Prime Minister preach about thinking "first world". Well, here is first world thinking for you. Please stop throwing money at useless submarines and other ridiculous mega projects and focus on what's most important for our country. There is no need for cute catchy names like 1Malaysia to label our people. Let's not be sidetracked about the issues that cloud the real matter at hand. Focus, and we can all prosper.

Economics @ Home © Volume 1 Issue 6

Merdeka Day

This weekend is Merdeka Weekend. I thought about writing a special issue for Merdeka Day but then I realized that I don't really do anything special on Merdeka Day. For those of you who don't know what it means, Merdeka Day is the independence day for Malaysia. Most of the time, I end up playing in a chess tournament in conjunction with the festivities and I get to meet my friends from all over Malaysia. I really looked forward to this even when I was much younger. I am still going to be playing chess this weekend. Perhaps I do not look forward towards this event with the same earnest, partly because so many things have changed since the days that my friends and I used to dominate this tournament. Ever since they opened it for the whole of world and introduced a bunch of funky rules, coupled with the fact that players that I played with are mostly more focused on work right now (including myself), it is indeed difficult to find the same enthusiasm that once made me wait the whole year for this event.

Nostalgia aside, there are many different meanings of independence to this country. One of the most common reasons that Malaysians celebrate this day is that this country obtained its independence from its British oppressors in 1957. While that was the reason 31 August is commemorated each year, the reason that most Malaysians celebrate Merdeka is probably because it is simply a holiday. People don't have to go to work, there is no need to "struggle", no need to plod, no stress, and people can just have some "leisure" time to themselves. Regardless of the reasons people celebrate this 31st August, I would like to indulge in some of the reasons why we should not be celebrating.

This is not an attempt to be a party-pooper but I simply find it difficult to shut out the glaring deficiencies in this country while pretending to be thankful for 52 years of "peace and harmony". While we have been absolved from the grips of the British, for the most of the past 52 years, we were bound by an even stronger but more subtle oppressor. Like always, I will steer clear from politics because I do not pretend to know how to run a country. My job as an economist is only to analyze the costs and benefits of any issue that I deem interesting. Anyone can point out the flaws of any government and the simple rebuttal of "nobody is perfect" speech by the government can hardly be refuted. Mostly because no one is ever given a chance to refute this. This is what I mean by the subtle oppression that we face. It is redundant to scream for the freedom of speech and what not. Thanks to the internet, I am able to share my views with you today. But my readership is ever so limited. What can one expect after six volumes, right?

The goal of this issue is to discuss this attitude of "nobody is perfect". I assert (just like all great economists do when they begin an argument) that this is a result of plain complacency. I keep reading about the anger of the people who demand such and such from the government and I cannot help but share their anger. It is too easy to notice the sad deficiencies that our country faces, but the important issue is why we cannot escape our miserable fate? The government and some people keep preaching about how lucky our country is. I remember back when I was in Form 1 that my history and geography teachers taught me that Malaysia is a lucky country because of our natural advantages. We are shielded from earthquakes, tsunamis (except for that unfortunate day in Penang), volcanoes and what not while enjoying the advantage of having THE trade route that links the West and the East in the form of the Straits of Malacca.

After the British left, we were left with the same advantages. Our economy grew rapidly despite the falling out with Singapore, courtesy of the vision of our first Prime Minister, Tunku Abdul Rahman. Why did we advance so rapidly and what happened after that? After being "freed" from the British, Malaysia was hungry. We have been hungry for a long time but we were leashed down by an oppressive nation. Malaysia rose as one of the five tiger economies. However, if we look back over the past forty years and compare ourselves with the likes of Singapore and Thailand, the flame that was claimed to be Malaysia's just seems to be fizzling out like a dying ember. What happened?

As I said before, the problem is complacency. For the past few decades, our country has basked in the doldrums resulted from self-content. There is no need to say that while Malaysia and Singapore are about the same age, the difference in the maturity of our economic strengths are astronomical. The national income per capita of Singapore has grown to at least three times that of Malaysia since our independence. That is without accounting for the handicap in terms of the lack of natural resources that Singapore had. We often hear that Singapore is a smaller country and this made it easier for them to advance. They have fewer mouths to feed, thus having more resources to focus on growth. We simply forgot that they have no natural resources at all. Well, at least not those that can be harvested from the Earth. They simply harvested the most valuable natural resource of all: human capital. On the other hand, Malaysia rested on its laurels of being "the best" in the region. We were ONCE the largest rubber exporter. We were ONCE the largest palm oil exporter. We were ONCE the largest exporter of semiconductors. We were number one in the world. They still tell us that in our history books. Then after that, as years go by, we decided we should fish in a smaller pond and became number one in South East Asia and then number one in whatever smaller region you can think of.

After the 1997/1998 Asian Financial Crisis, we almost chuckled at Thailand because of its financial meltdown. We again looked upon lesser foes and crowned ourselves champions of the weak. A little known fact is that the national income per capita of Thailand has overtaken that of Malaysia assuming we had started off from the same base since 1970. Who is having the last laugh now? Not us, for sure. Forget about Thailand. Let's laugh at Indonesia because they can't even keep the bombers from blowing up their own people. Guess what? If you study the growth in the national income per capita of Indonesia, you will notice that Indonesia is gradually catching up to Malaysia ever since Bambang Susilo Yudhoyono, was elected president in 2004. Before long, maybe Malaysians will be sent to Indonesia as maids. Scary thought isn't it?

What are we champions of next? Oh wait, what about Laos, or Vietnam, or Cambodia? We are still better than them. Are we? 52 years ago, we celebrated our independence with the hunger of an unfed tiger. Today, our government has indeed satisfied that hunger. We have kept them well-fed. March 2008 served as a wake-up call for these satiated monsters and we can only hope that the same hunger of the sixties is rediscovered. Or do we leave it to hope?

I can only hope that I will never be stuck in this rut of a complacency that I was once guilty of. Indeed I basked in the doldrums of self-content. Today, I repeat to myself everyday, the grand message that Master Steve Jobs passed to me, "Stay Hungry, Stay Foolish". Maybe one day, I will truly stay hungry and foolish and be proud of it.

Economics @ Home © Volume 1 Issue 5

Economics of Brutal Honesty

Remember the time when we were young and we were told never to tell lies? “Honesty is the best policy”. Once we got older, not only did we learn to lie but we also became masters of deception. The power of reasoning was bestowed upon humans. Because of this, not only are humans able to weigh the costs and benefits of lying, but are also able to justify their deception. This issue explores the incentives for dishonesty and whether honesty really is the best policy.

First of all, many people will argue that concealing the truth does not tantamount to lying. That is to say that silence over some relevant issue is not equivalent to lying, which is often defined as disclosing information that is contrary to actual facts. I assert that nondisclosure is within the class of falsification or lying. Saying that it isn’t a lie is merely the justification of the lie that is a consequence of human reason. Before you become defensive, let me first clarify that I do not pretend to be a moral judge. I don’t care if it’s OK for you to lie. Whether or not it is “right” or “wrong” to lie about something is dependent on what “right” or “wrong” really is. That debate will be left for theologists and philosophers because those issues are not really relevant and their accurate definitions are unnecessary for our topic of interest.

One of the most common reasons that people lie is for protection. They lie to protect others, which apparently makes them nobler, or to protect themselves, which may or may not make them selfish. Usually, people who lie to protect are involved in issues that revolve around extreme danger. The common mentality is “the less you know, the better”. Usually, one has committed wrongdoings or is a witness to a crime. People can choose to hide the truth to protect themselves and their family to avoid retaliation. But if you were to think about it a little bit more, you will recognize that the need for protection is a result from the feeling of fear. Fear is a survival mechanism inherent to all living things. Applied to controversial issues of Malaysia today, many parties have cowered in silence for fear of retaliation from corrupt authorities and people in positions of power. Even the mysterious letter implicating the former Selangor MB and the TP of MACC was signed “anonymously”. If these witnesses were to list down every single one of their names, would the letter not appear to be more credible? However, in the animalistic world today, their very own survival is a priority. If every human being were to always consider the benefit of the greater good, then the benefits of always being honest will probably outweigh the costs. However, to a rational individual, the loss one’s ability to survive is of infinite cost, especially when compared with the marginal benefit one can gain from being honest.

The second incentive is closely related to the first. People lie for their own gains. Survival and protection is merely a subclass of one’s personal gains. Other common gains come in various shapes and sizes: money, power, pleasure and happiness, just to name a few. With so many incentives that can grant almost infinite utility (satisfaction) with relatively little personal cost, shouldn’t the real question be, “Why not lie?”. Once again, we have to look at the bigger picture. Cost-benefit on a personal basis would logically lead one to lie. However, many real life situations that involve lying are zero-sum in nature. That is to say, one man’s gain is another man’s loss. On a larger scale, not all situations are zero-sum. In fact, most scenarios have positive externalities when honesty is applied. Nonetheless, this would require one to actually consider the costs and benefit of a larger group as a whole, which is very often not the case. Our primal instincts tell us to look out for ourselves and our “own kind” (family, closed ones etc.). Fortunately we are not all animals.

Recently, I read a quote from Khir Toyo that made me laugh. The comment was referring to the mysterious letter that was handed to Gobind Singh that implicated several top officials and politicians, including Khir Toyo. This letter was published on many blogs and other online sources. I will not post the letter here because this is not my fight and I tend to get very emotional when I discuss cases like these. This was extracted from the Star:

Meanwhile, when contacted, the politician (referring to Khir Toyo), who was overseas, said the allegations were baseless. “I have nothing to gain by toppling the Selangor government,” he added.

“I don’t think it’s the work of MACC officers. What are they going to get by making such wild allegations?” he asked.

At first, you may not find it as funny as I did. But let me point you in the right direction. It was not because I think he was lying, but because of the reason he gave: “What are they going to get by making such wild allegations?”

This is so typical of a pig who only knows how to think of himself. He thinks that everything that everyone does is for self-gain. Maybe on an individual basis, the authors of the letter would gain nothing. However, to expose a corrupt fraud and pig of an ex-government official in a country that is trying to stem corruption from the core is a huge gain for the people of the country.

Let’s backtrack a little. Before this he said: “I have nothing to gain by toppling the Selangor government”. Once again, talks about self-gain. Clearly, a man who only looks out for himself. If only investigative journalism was more mature in Malaysia and reporters were given the free reign to report facts. A pig would never be able to hide under a man’s clothing. Of course I have no evidence to claim that Khir Toyo was lying when he said that. However, any being of at least miniscule intelligence can tell that there is everything to gain for an ex-Mentri Besar of Selangor to topple the current Selangor government. After all, he is the one who is living in a house that is allegedly worth RM 24 million.

Furthermore, theoretically, a politician should have an inherent desire to serve the public. If he still believes in such things, there should not be any talk about self-gain in trying to win his old position back. Do it for the people. Or maybe he thinks that the current Selangor government is doing a great job for the people. Maybe that’s why there is no reason to topple them. I guess I did venture a little too far into politics. Told you I’d get emotional.

Back to economics. There are many countless examples of people lying for self-gain. One can easily point to Bernie Madoff and his USD 65 billion scam. With the incentives of lying so tempting, can we really blame people for lying? Is honesty really the best policy? After all, these liars are behaving merely like the Homo economicus that we assume people to be in our study of economics.

If only we were Homo economicus, then we would have all the right reasons to lie. We are Homo sapiens. Some of you do not need to be reminded of that. However, it is not too uncommon that sometimes Sus barbatus forget what they are.

I would like to remind everyone that cost-benefit analysis must never be abused. While it is easy to see the infinite gains for oneself when practicing deception, it would be nice to think of the costs and benefits of everyone that is affected by our decisions. More often than not, the benefits enjoyed by the group far surpasses the cost to ourselves. That is why we call it the greater good. That is the world that I hope my children will get to live in. A world that prioritizes the greater good.

Economics @ Home © Volume 1 Issue 4

Where is my money?

How many times have you asked yourself that question, or some other similar version of it? Waking up at 7.30 a.m. to go to work and returning past dinnertime every weekday just to keep your family fed. As Monday begins, you look forward to Friday, AGAIN. Some of you even dread Sundays because tomorrow is Monday. Weekends are a whole lot of fun because you get to watch TV, hang out with friends, or do whatever it is that you do. To make things worse, after all that, when you receive your paycheck at the end of the month, you feel only two seconds of joy as it dawns upon you that you have to pay your rent, your bills (electricity, telephone, internet, handphone and god knows what else), your wife (for her to buy groceries and necessities for your family because she quit her job to take care of your children; you refused to hire a maid because you want the best environment for your children) and the list goes on. By the time you subtract all these expenses, you are afraid to even look at the balance that remains. Maybe that’s why you don’t keep account of your expenditure. Does the above sound like you? Granted, most of my readers have not had a family yet but I hope the story is something you can relate to.

Don’t misunderstand me. I am not saying that you are struggling to make ends meet, but I believe that you wish you had more money at the end of every month. There is a reason why I keep referring to “you” throughout the introduction above. If you feel belittled or angry or even better, you said to yourself, “That’s definitely not me”, then you have even more reason to read this issue.

The purpose of this issue is to raise awareness regarding personal finance. Though I do not claim to be an expert on multiplying my money or earning millions, I feel it is important to know how to be prudent. I am talking about that date you had with your girlfriend last Saturday that cost almost RM200, the clubbing nights you had with your girlfriends on Friday and Saturday, that extra haircut you had last week because you suddenly decided that a straight fringe does not look good on you. I am almost certain that at that point in time, you had a dilemma whether to spend that extra money or not. It wasn’t that you couldn’t afford it, but it definitely is a decent proportion of your monthly income. That is to say, I don’t think you are not prudent. In fact, you showed great persuasiveness and reasoning skills to the extent you convinced yourself that you are either doing it for love, or because it is a once in a blue moon kind of thing and not purchasing spontaneously. I am not going to judge your spending habits but one thing is for sure, these expenditures add up and very quickly at that.

I have not even gone into the fact that women (more mature form of “girls”, which was actually my first word choice referring to the female human species) shop for clothes, shoes, makeup and all the other ego-enhancing doodads that sometimes make them appear more glamorous and aesthetically pleasing than they actually would be (or in some cases, less). What about the manicures, pedicures, spa sessions and gym memberships, yoga classes and pilates? At the end of the month, you often ask, “Where is my money?”.

Where is your money, indeed. The only way we can ascertain exactly where all the money went to is to prepare a simplified income statement or cashflow projection that I showed two issues ago (refer to Volume 1 Issue 2: The Lean and Mean Machine Pte Ltd). Once you figure out where your money goes, the next step is to list those spending down in order of priority. Some people rate shopping above food, so… I don’t know what your list would look like. Now start from the bottom up and ask yourself two questions? First, “Is this expenditure necessary?”. Second, “By how much can I reduce this expenditure?”

Of course, cashflow projections are meant to be taken seriously. I recommend a 10% decrease on unnecessary items such as shopping, eating at restaurants and things like that. Try that for a month. It takes a lot of discipline and self-control. So to help you, you should visualize a goal that, something that you really wish you could do or have, be it a trip to Paris, or an iPhone, or your favourite LV bag, if you had enough money (by which I assume you currently do not have enough). With this goal in mind, every month you manage to save a proportion of your projected expenditure would seem like a huge step closer to attaining this big dream of yours. This is how you are going to get what you want. That is of course assuming that is the point of asking “Where is my money?” to begin with. There must be something that you want.

Just to switch gears a little, I would like to address a slightly larger perspective. On a macro scale of things, many of you who have existed in the past ten years or so would have heard about our fourth and fifth Prime Ministers who don the fancy Egyptian crowns and declare themselves Pharaohs, building their pyramids and monoliths. What am I talking about? I am talking about the Mega Project era of Malaysia, the dark times when projects of galactic proportions mushroomed throughout our country.

Let’s visit a few, in case you’re struggling to think of any. The most notable one would be our local favourite Petronas Twin Towers, which cost about RM1.8 billion. In a news article, Mahathir was quoted as saying that a country needs “something to look up to”. With a building of that height, there is no surprise that we have to look up to get a full view of it. Not only did the towers cost a fortune, it was built right smack in the middle of KL, the jammestest city in Malaysia, even worse than Sydney, a city with a much larger population than KL. More offices in the city means more people have to travel to the city to work. The debate about all the man-hours (and woman-hours) lost each year due to traffic jam is almost disgusting and will be left for discussion on another day.

Second, how many of you have heard of Putrajaya? Now, how many of you actually know where it is? If I did an actual poll among Malaysians, my guess is many of us don’t even know where Putrajaya really is. But guess what? The administrative capital that is actually in the middle of nowhere cost RM5.26 billion to construct. Among the buildings there is the “Prime Minister’s Palace”.

Third on the list is Malaysia’s favourite racing circuit, the Sepang F1 track (other than the streets of KL). At least one can say that street racing has been curbed to a large extent, no thanks to the 300 bumps that were laid across each straight road. One only has to visit the housing area of SS2 to see that 300 is probably not an exaggeration. The F1 track that was built, again, in the middle of nowhere cost taxpayers about RM75 million, a midget figure compared to the previous two projects.

Lo and behold, the fourth superstar, the KL International Airport. The airport is another one of the super projects that was located “a stone’s throw” from the city as publicized by the media. It only requires one to drive about 45 minutes to the airport for a 40-minute flight to Singapore. The airport cost about RM2.36 billion. To makes things worse, the airport was so seldom utilized that the government had to force all international flights to go through KLIA to maintain its A grade rating. In the past, Japanese tourists frequented Penang because of the direct flight that was available from Narita, Tokyo to Penang. This option is no longer available as one has to go through KLIA now. The Japanese no longer visit Penang and the tourism in Penang has suffered tremendously because of this.

Even more recently, any newspaper reader would be aware of the PKFZ scandal in which Kuala Dimensi Sdn Bhd was alleged to have overbilled the government close to about RM1 billion for the development of Port Klang Free Zone. Of course, the exorbitant expenditure works both ways as the overbilling was not questioned at that time and the government overpaid KDSB, or did they? Nonetheless, with its political twists and turns, the scandal is far from being settled and one can only hope that the case will not be buried six feet under once again just like the many high-profile scandals that have occurred in the past. I must be cautious not to misquote anyone or throw any names to avoid being pulled from my comfortable armchair by the ISA. Who is going to stage a demonstration for an unknown person like me to get me out?

I do not have to total up the billions that were spent on these mega projects to tell you that you are not alone when you ask, “Where is my money?”.

It would be too harsh to equate oneself with the excessive spending of the government but the idea is similar. We spend and we spend on things that we may or may not need and pay a price that sometimes far surpasses the intrinsic value of our purchases. To put it simply, we are paying RM10 for the new RM9 note, just because its unique or some other funky reason. Would you pay RM10 for an RM9 note? If we try our best to live life practicing strict valuation on our purchases as well as good cashflow planning, hopefully we would never have to pay more for something than what it is actually worth. So for those of you who have asked yourselves, “Where is my money?” it is about time to wake up and smell the coffee or roses or whatever it is that you want to smell. Start taking control of your money and don’t let your money control you.

Where is my money, indeed...

Economics @ Home © Volume 1 Issue 3

Economics of Love

How can love and economics ever be related? The relationship between these two is a lot closer than you think. Economics is a study of scarcity and as we all know, at some point or another in our life, we have definitely experienced the scarcity of love. In life, everything that is in shortage will definitely have a price, monetary or otherwise.

For the sake of simplicity, I choose to discuss this topic in the case of heterosexuals. Goodness knows I am not that familiar with the concept of Homosexuality and how it works. As usual, let us begin with a basic assumption. We first assume that when one is in love, he (now and henceforth unless otherwise relevant referring to both genders for the sake of time and convenience) has a commitment towards an on-going relationship with a partner, or several but that is usually not that common. I try not to make too many assumptions so that I do not limit the scope of my argument. I believe that any sane person would agree and allow my assumption.

Now, I am not going to pretend to know everything that one should do when they are in love. However the most common activity among couples is probably dating. Dating does not have to be dressing up and going to an expensive French restaurant, eating over a candlelit table for two. Let us consider a typical date among couples.

Tommy and Sharon have been dating for six months (I am going to assume they are in love or at the least, they think they are). They are both gainfully employed. They try to see each other over the weekends as often as possible, whenever their schedule permits. Just last Saturday, Tommy asked Sharon out for a dinner and a movie. Sharon, of course, having not seen Tommy for more than three weeks not only agreed, she even requested that he pick her up at two so that they could just hang out a bit more.

On that eventful day, Tommy arrives at exactly 2.01 p.m. at Sharon's apartment and Sharon, being the loving girlfriend that she is, ensured that she was punctual because she knew that Tommy is very picky about tardiness. Being the gentleman that Tommy is, he brought a pink rose (stereotypically Sharon's favorite) for her. Now we have arrived at the juncture where I explain to you what the point of this story is. We are going to estimate what a date costs for a couple (or in most cases, men) to go out on a date and hopefully make some conclusions about the price of love. The rose just cost Tommy RM10.

On with the story. Sharon gives Tommy a tight hug and a long frenchy, long enough to give him a whiff of the Chanel perfume he bought her for her 23rd birthday (RM350). After some additional tender-lovingness that is not going to be elaborated in this issue (or any other issue), they are on their way to Mid Valley. What is there to do at Mid Valley besides shopping (window or otherwise). Now, before you begin having preconceptions of me exaggerating the cost of date, I assure you that for the sake of all my avid readers, Sharon is not a spoilt brat or a demanding girlfriend. The shopping mainly constituted browsing through clothing from shops like Zara, Top Shop etc. Occassionally, Sharon would hint at Tommy about how nice that skirt was at Zara. Tommy would reply nonchalantly while making a mental note to get it for her as a surprise during the next special occassion. That skirt will cost him RM 59.

After walking around for about two hours (Tommy is a real man and he is not going to bitch about shopping), Tommy suggests that they get a drink and relaxed for a bit. Sharon excitedly requests for a Mocha Frap from Starbucks. Knowing that they probably might not finish two drinks, Tommy orders a Large (or Venti or whatever they call it) Mocha Frap. RM16.50. They agreed that they should probably get their movie tickets while it is still early. Two tickets for couple seats for Harry Potter: RM 30. Nothing eventful occurs until dinnertime.

After haggling over Sushi Zanmai or Italiannese, they finally settled for Italiannese because there was no line at the entrance. Salmon Fettucini and Calamari Caesar Salad, with two drinks: RM80 (conservative estimate).

I am not going to include the price of popcorn or drinks during the movie because any sane person who has eaten at Italiannese will know that after dinner, you'd have to be Jabba to down more food. After the movie they left Mid Valley and headed back to her place. Depending on your imagination, what entails will be left out and let's assume that it cost them about RM12.

Totalling the cost for the goods that were mentioned in the relationship:

Rose: RM10

Chanel Perfume: RM350

Skirt: RM59

Mocha Frap: RM 16.50

Movie Tickets: RM30

Dinner: RM80

Parking: RM5

"Extra goods": RM12

Total: RM562.50

Total (excluding perfume): RM212.50

Okay, maybe the perfume was a bit too much and let's just assume it's a once a year thing. Even so, the total expenditure for the day was a whopping RM212.50!!

If you have read my last issue, my company's total expected expenditure is RM1765. That would mean that a date would cost about 12% of my monthly expenditure and 9% of my company's revenue. Wow!! I am sure any beginning investor would be happy to make 9% per year.

Let's just say they only manage to go out once a month. Now we include spending during special occassions like Birthdays (two a year), Valentine's Day, Anniversary (2 gifts), Christmas (2 gifts) and random gifts (2 a year), Assuming that RM150 is spent per gift, that would entail another RM750 per year. Total expenditure per year of dating would be RM3300.

Is love worth RM3300 per year? I don't know. To some people, maybe. I mean, if you paid for an escort, it would probably cost more than RM212.50 per day. So maybe it is worth it after all.

The Lean and Mean Machine (update)

For cost and efficiency purposes, I have decided to only to publish my income statement monthly, all the relevant financial statements quarterly, and a special annual report.