Archive for  April 2015

Home / April 2015
1 Post

My post script on my last post is a good gateway into this one.  While the public at large may not struggle to find significance in the things they invest their time in as I do, we do have some things in common.  Namely, we both tend to look at things monotonically.  Meaning that the more of a good thing that you get the better off that you are, and conversely, the more of a bad thing you get the worse off you are. For example, most societies would agree that killing is a bad thing, and that more killing is worse.  Societies would also generally agree that material goods are in fact ‘good’, and that they more of them one obtains, the better that person will be. In these cases, monotonicity is justified, but I suspect, that in many others it is not.  I think that in many cases I, and perhaps we as a society, make unwarranted linear extrapolations from small samples.  I suspect, and I will try to explore, the idea that there is such a thing as ‘enough’ and that monotonicity is not justified in many cases.  Somewhat more formally, that increases in an independent variable do not inexorably lead to increases in a dependent variable.

For the rest of this post, I would like to focus my attention on just one monotonic good that society points towards, money.  While it is not everything, it is a major focus of modern life. It will certainly be one of the focuses of my social enterprise.  

Generating money as an owner is not mathematically complicated.  Take your revenue (R), subtract your cost (C), and the difference is your profit (π).  A simple equation, R-C=π.  Many people simply try to maximize π and call it a day.  Deng Shao Ping opened up the modern Chinese economy with the phrase ‘to be rich is glorious.’  The old Chinese premier exemplifies this monotonic view of money, but he implicitly challenged another.  We’ve got to move ourselves back in history a bit, but up to that point the Chinese communists had believed all ownership was effectively stealing from the workers.  They tried to abolish ownership and give workers 100% of the value of their labor. In their equation, they tried to reduce profits and drove up costs. This clearly didn’t work. Owners seem to require some recompense for their capital, and managers for their managerial skill, but just how much?  Should we agree with this latest generation of Chinese communists and believe that being a rich owner is glorious?

Why not enrich the consumers by charging a lower price at the expense of owners (driving down unit-revenue and often profits, but keeping costs stable)?  Why not enrich both at the expense of suppliers (driving down both unit cost and unit revenue)?  How to figure out which one of these is the right course?  The key thing that I would like to solve for, in the context of a social enterprise, is how much is enough for each of the constituents of the business?

Happily, since they are not fundamentally different types of people (i.e. owners are human, workers are human, as are suppliers), this question can be asked once, and answered for all.

The first question is whether indeed people are increasingly happy with increasing wealth.

The sophisticated point out that monotonicity need not be perfectly linear (mathematically, monotonicity only requires that the first derivative not change signs). For example, some people look for more wealth, and it does indeed bring happiness, but $10 means a great deal more to those who have little than it does to those who have a great deal.  I can recall girding myself all in white to go to work in a nursing home when I was sixteen.  I marveled at the prospect of being paid $12 per hour to feed, change and dress one quarter of one wing of a nursing home.  Today, given my current financial position, I would be hard-pressed to do the same for several multiples of that amount of money.  In this, as in so many things, I do not seem to be exceptional.  I did a bit of research on this. Money is a normal good, and it has diminishing marginal utility as we get more of it.  In basically every country people continue to get happier as their household income increases, but each incremental unit of wealth makes them less happy see here (note the log scale which accounts for diminishing marginal returns). Oddly for this one is how much less or more happy people can be at the same income level in different countries.  This is something like a formal view of the keeping up with the Joneses

I thought that I might add some more data to this pool, so I have been conducting something of an informal survey at home, work and with friends about ‘how much is enough’.  I would like to ‘play back’ as it were some of the responses that you/they gave.

This line of questioning centered around three questions
  • How much money is ‘enough’ for you to stop working?
  • What would you do with your time if you had that amount of money?
  • What steps are you taking to move yourself toward that?

I asked some of my colleagues from Japan how much is enough for them.  Bear in mind that this is a country that was incredibly materialistic in the 1980s, where the grounds of the imperial palace were nominally worth more than the entire state of California.  After 20 years of stagnation, they seem to be generally happy with a bit less.  They have discovered that although the prices of their assets were not skyrocketing, their workdays were not skyrocketing either.  It was no longer the expectation to work six days per week, drink every evening with you colleagues, and only see your family for a few hours per week. They were happy that they were able to see their children and families, live on a little less, and dispatch with the stress. This may be the root cause of their deflation…

For my Chinese colleagues, who are probably just cresting the top of their debt-fueled bulge, they did not have an answer for me when I asked how much was enough.  I reminded them of the prominence of Buddhism of their country, that alleviating themselves from want was one of the core tenants here, but they thought that was a bit passe.  From Chinese Expats, I was sometimes told that I didn’t understand the poverty of the old system, and that I couldn’t imagine what a failure they would be perceived to be if they went back and settled with less.  Apparently, to be rich is still glorious in China.

I chatted with my Indian team as well about how much was enough.  They are grasping the same materialistic ladder that Japan climbed, and China is reaching the top of.  I did get an interesting answer from one of them.  One of my colleagues has a son who is three years old.  He and his wife apparently took the government to court in Delhi for the right NOT to send their child to school at that age.  The other parents, and the government were aghast.  The line of logic from the government was something like this:

Don’t you understand that if your child does not make it into the right preschool, then they will not make it into the right kindergarten, and then the right elementary school, and on and on until they would not make it to Indian Institute of Technology, or Indian Institute of Management.

I did think it somewhat odd that although my India team was willing to push back in some ways that they did not merely want to sell everything up and move to the Indian countryside where, with the wealth that they had amassed in a year or two at Google they could have lived like kings in their own land. Perhaps this is a cultural component of the tepid rate of growth we see in India.  It might not all be the license raj.

I asked a few more of my colleagues with Australian backgrounds how much would be enough for them, and what they would do if they got that amount.  To the first question, the answer generally seemed to be ‘double what I am making now would be enough.’  When I asked what they would invest their time in, I got a thinly thought through list of things like family, charity, and ‘other stuff.’  Most of their brain space was actually dedicated to the first goal of doubling their income, that they paid little mind the the second, notionally preeminent goal.

One of my colleagues from the US stated that she would merely work very hard for these few years, make as much money as possible, and then effectively change her entire life when she got married/had a child.  I pointed out to her that she indeed probably earning double what she did a few years ago, and it still was not enough.  I also pointed out that if she continued to work as she did that she would be unlikely to find her mate.  Finally, I mentioned that in my limited unscientific survey of people that I had seen no one dedicate themselves wholly to money and then turn back when they had a family and children.

Almost as if to prove my point, I spoke with one of my more senior colleagues, also of North American extraction, about the travel that he did for work, and he rationalized it as ‘well I only really get to see my girls for two hours per day max, so if I’m out a week, then I just need to dedicate 10 hours on a weekend.’  He had so clearly convinced himself that the only way to maintain or grow in his position was to work 14 hours per day that he was also willing to write those days off because they were worthless as family time.  

I also asked my Mother. While she is retired, and not in the business of amassing more things, she’s actually at the stage of her life where she is trying to reduce them.  She told me that in her working years she had to forego buying a house so that she could send my sister and I to private high school.  That ‘enough’ for her was knowing that we had a better education.  That seems quite noble, and  I have no doubt that in her mind it was exactly that, but in retrospect, if you have a look at what some of the people in the tinyhouse movement have done, then I am not sure that in the end we were really much better off than them.

So where did these informal interviews point me?  They generally agree with the much remarked-upon consumerism of our current age.  There are those countries that has seen it at its highest, and are coming down, and those that are all in various states of continuing to strive after it.  One thing that I is remarkable is that with the exception of Japan, where a bubble had truly blown, everyone remained committed to the idea that there was a monotonic relationship between material wealth and happiness.  

Remarkably, amongst the people that I asked, I also saw some strange patterns
  • How much money is ‘enough’ for you to stop working?
    • Only one person I asked said they would be happy on less than they are making now
  • What would you do with your time if you had that amount of money?
    • Only perhaps 50% of the people I asked had really given any thought to this
  • What steps are you taking to move yourself toward that?
    • Only 2 people I asked were doing anything to move themselves closer to their goal.

Back to my original point in asking this question. If these people are correct, then this leaves me in a troublesome spot.  If wealth continues to increase happiness, then there is no limit for each of the claimants of cash for the firm (the suppliers, the firm itself which can be further divided into owners and laborers, and the consumer)?  Ironically, the case could be made that since each marginal unit of happiness is harder to achieve, that we should be more happy to give an owner an ever-increasing share.  

We could just pick the level of income for each that we think would be adequate and go forward with that.  I looked it up, and it looks like $75K is the right amount in the US.  That comports with some research in Australia which points to $100K AUD being the right benchmark here.  We’d probably need to adjust both up to account for the higher cost of living in Sydney (a bit more expensive than NYC according to the economist intelligence unit, so probably something more like $150K here).

So does this data prove that there is a monotonic relationship between money and happiness?  I’m undecided. What if, when we set happiness as the dependent variable, and money as the independent variable what we are picking up is a spurious correlation at the top end.  That rich people tend to break out into two groups.  Those who care a great deal for money, and are genuinely happy to have more of it, and those who care little for it, and are thus happy to be free of rushing after it.  That is the independent variable correlates highly with another variable at the top end.  Most disturbingly, to preserve the monotonic relationship in the data, we would have to believe that some people who are extremely wealthy are actually becoming very unhappy, while their peers, making the same amount are deliriously giddy.  Even more simply, if the average is going up, but half of the population is becoming less happy, than the other half must be even happier.  Perhaps there is wisdom in the personage of the proverbial Scrooge.  The miser who, for all of his wealth, is uncontent.  Perhaps there is also a reason that ‘old money’ people and most Roman citizens in the richest time of the Roman empire saw money as something to be disdained.

While I don’t have a dataset of the truly amazingly stupidly rich, by any standard the people that I talked to were incredibly wealthy, and all thought that happiness lay in some multiple of their income.

While I initially thought of my experience in the nursing home was only illustrative of one point, I can see that it elucidates another.  I still believe that working in a nursing home was the most difficult job that I have ever done.  I rarely been so heartbroken as when I helped some people put on their threadbare clothes on a Sunday morning and wait all day for their children to come pick them up for a drive in the country.  As the shadows got long, I had to announce to them what they already knew, that the people they brought into this world and cared for could not even bother to call to say they could not make it.   I do not pretend to know exactly what the absentee children of my nursing home patients did on their Sundays, but since it was Wisconsin, I can guess that their time was filled with some part recuperation from Sat night, Church?, Sports, and time with their families.  Those all seem to be fine enough goals, but to get those things my fellow Wisconsinites had to work a great deal.  They could undoubtedly have skipped two hours of work during the week, done one of the things that was important to them, and then seen their parents on a Sunday, but they did not.  Why not?  Well, I suspect it is because they believed in this monotonic relationship.  They over-loved their money, their time with friends, sport, and down-time.  What they were not able to articulate well enough for the lonely person with wispy hair was that while that person may have been important to them, they had trouble just saying ‘I have enough.’  They actually started creating negative things in this world because of over-love.

This is not a new concept.  Plato talked about it as a golden mean.  That between cowardice and rashness sat bravery, that between timidity and verbosity sat a pleasant conversationalist.  Unfortunately for us (and fortunately for us in other respects) we don’t live in a Platonic society.

I think a fitting end to this is from Seneca (here in a nice podcast form, or if you prefer here in a once-popular pop song):

The acquisition of riches has been for many men, not an end, but a change, of troubles.  I do not wonder. For the fault is not in the wealth, but in the mind itself. That which had made poverty a burden to us, has made riches also a burden. Just as it matters little whether you lay a sick man on a wooden or on a golden bed, for whithersoever he be moved he will carry his malady with him; so one need not care whether the diseased mind is bestowed upon riches or upon poverty. His malady goes with the man. Farewell

PS here’s some other things that I ran into on this topic, but I couldn’t figure out how to work into the narrative, it’s already all over the place.

Interesting Things I’ve looked at since the last post

  • Investing/Economics:
    • The idea of investing in a group of people instead of an individual cause occurred to me.  As one negative example Soul City cropped up the in my podcast feed.
  • Giving
    • I have done a small study on whether there are advertising agencies that will help nonprofits.  I sent out the question on Quora, see here, on Linkedin, see here, with the Truman Scholars Association list serve (where I heard about Spitfire, and had others echo the need, but I’m not sharing directly so people’s emails are not picked up by spam-bots), and on Facebook (I can’t share the link because Facebook tries to keep everything in their ecosystem).
    • I got an email from the Truman Scholar’s listserv about this program.  It never ceases to amaze me the scale at which America operates.  I Australia, I would be hard pressed to find a large number of people who know what a social enterprise is, but in the US, there’s a damn program to start them.
  • General
    • This is from my province.  I traveled to this base a few times while I was deployed in Helmand Province, nothing seems to change, and it seems that nothing is better.  It seems that my ‘firstly’ attempt still have not paid off.

Please, tell me what you thought before reading this, and let me know if this changed your mind.