Blek srajdej

Why do we, Poles, have to embrace every single idiocy devised by the American capitalism? To quote Leo, for money! There is no better way to induce a slow-witted consumer to spend their money on stuff they (usually) don’t actually need than persuading them they are buying at bargain prices.

Black Friday (hailing from the USA, where it falls right after the Thanksgiving) is rather a novelty in Poland, as a decade ago, or even five years ago if it was celebrated, then by few. In 2018 blek srajdej is all the rage. Upshot: shopping malls chock full of people and online distributors’ websites crashing. I have witnessed stories of people taking a day off to indulge in bargain-hunting shopping and got infuriated by workmates collectively hunting bargains online in the office while I tried to focus on work.

A thrifty consumer with a head screwed-in can easily grow sick of advertisements of countless discounts and sales assaulting them from all angles that make them want to puke, but not make them give in.

The best one can do not to get carried away by the craze is to think what you actually need. I need rest, therefore I had decided to shun shops on Friday. Had done the little shopping in a discount shop on Thursday evening and ate a self-cooked lunch in the office on Friday. On Friday not a single grosz fled my wallet, nor my bank account, nor my credit card. Such was my uncanny way of celebrating the blek srajdej.

To be fair, yesterday I purchased lighting to my flat at bargain prices (and have not found crowds at the shop) and today I am heading to DIY supermarket to buy some kitchen equipment at bargain prices. My excuse is that I need that stuff, not go shopping for kicks.

The trade ban on Sundays has laid bare how badly Poles are addicted to shopping and to what disturbing extent they treat it as pastime activity. While I treat a trip to a shop as a task (go, buy, tick off), most people go there for pleasure to pass time and waste money. This looks like a perfect starting point to a rant on virtues of protestant work ethics whose contradiction is the today’s debt-financed thoughtless consumerism, reaching its peak in pre-Christmas period. Even if indeed it is perfect, I am giving it a rest for a while. Short of time again, but remont moving on – will post some pictures in a week or two.

Oversized

Imagine an office (urząd) without petitioners (petenci). Imagine a school without pupils. Imagine a hospital without inpatients, or a health centre without the ill. A mind-boggling absurdity? From the times I was a student, I recall a conversation between two student office (dziekanat) workers both claiming their job would have been much nicer, if only they had not need to deal with students (ta nasza praca byłaby całkiem fajna, gdyby nie ci studenci). So much nicer would be a job of a clerk if only those obtrusive people did not come around. A work in a hospital would be much more rewarding, if personnel did not have to take care of those horrible patients. A work in school would be marvellous, if only teachers did not have to deliver classes to rowdy brats.

Smacks of absurdity? Not really. Each organisation, as it grows, goes through certain stages of development. With each consecutive one its structures are bigger, so they require more control, reporting, paperwork, etc. With time a profit-oriented organisation, i.e. a business no longer allocates all its resources towards attaining its core goal which should be making money. With time each company builds ancillary structures, which at first enhance specialisation and support front-line units, so that everyone can focus on doing their bit. As more time goes by, in order to keep the business together, companies set up more reporting / oversight / control functions. As the process carries on, fewer employees are focused on serving customers (i.e. looking after sources of revenues) and more employees are focused on dealing with internal affairs of an organisation. When the company is bigger, internal oversight structure are vital for keeping it going in line with a certain strategy, yet the question of proportions between so called front-office, middle-office and back-office is justified. The more of a company’s resources are directed towards back-office functions and the less towards front-office, the more mature the company is. But is it more efficient?

The term diseconomies of scale has not been coined without a reason. In an organisation’s development there is a point at which the organisation grows to unmanageable proportions, i.e. is too big to be run efficiently. This happens both in the government sector (which is more prone to such distortions) as well as in private sector, yet there probability of diseconomies of scale is strongly positively correlated with size. Overgrown bureaucratic structures no longer need customers to be have something to deal with. At the highest stage of this “internal focus” middle- and back-office staff can not see the forest through the trees. They no longer realise serving the customer who feeds them should be a top priority. The become so pre-occupied with processes, procedures, reporting and other self-oriented stuff that they forget those are the customers thanks to who they can earn a livelihood.

Oddly enough, such self-oriented organisations survive, albeit rarely thrive on the market. When an organisation reaches the highest stage of development (when it does not need customers to move on) it already has established a leading market position (often might be a monopolist) and superior reputation and switching costs for customers are high. These factors allow such company not to strive for many new clients and put little effort in retaining the existing ones. Moreover, front-office functions are never neglected. Employees who bring the company the bacon are property remunerated for securing revenues essential to cover costs of the bureaucratic structures. The inertia in such huge organisations can last years and such wicked corporations do not fall apart. Senior executives often realise what is wrong and launch initiatives aimed at reinstating customer focus in organisations they run. The frequent upshot is that an organisation focuses on pursuing the programme rather than on customers…

Some time ago I took part in a series of workshops aimed at streamlining and leaning process in my company. As the workshops developed and participants came up with new ideas, the picture which emerged showed clearly the customer is actually necessary to feed us with documents we could hand over from one to another, fill in to several systems, create reports, etc. The role of a customer is boiled down to a creature which sets the bureaucratic machine in motion. Once it gains momentum, it busy with document circulations, internal analyses and reports so that the customer drops to the bottom of its list of priorities. One day when the group of workshop participants was in top form and devised plenty of ideas how to improve workings of our company, I held back for a moment, examined what had been put forward and without second thought asked an inconvenient question “but where’s the room for customers in what we design?”. I poured cold water on my fellows, the silence came into the room. They all stared at me. I realised I could have overstepped boundaries, as dissenters are not flattered in corporate capitalism. To my surprise, no one denounced me, my remark turned out to be quite productive and changed the course of works during the next workshops.

After over three years of working in the same place, I am growing weary of my current job. Or to be precise, I have had enough of my employer and how my company is run. I do take pleasure in what I do and perform my duties zealously, so the symptoms do not signify burn-out, but I am frustrated with prospects my employer and I have, or rather do not have. My employer is a part of a huge corporation with operations in most countries in the world. My diagnosis of the problem they have with their Polish recalcitrant subsidiary is that the operating environment here differs from those in other CEE countries. The corporation refuses to compromise and adjust its doing-business guidelines to specifics of the Polish market. They fail to recognise the simple rule “shape up or ship out”. They neither shape up, as consistently they fail to discern the Polish market is not malleable and will not alter to meet their expectations, nor have the courage to divest of the defiant business which totally does not fit the rest of the corporation. Customers are lost, profits are shrinking and prospects of turnaround are miniscule, because the organisation is so big that the decisions as effect of which the company could get up from its knees would have to be taken by decision makers who could not point Poland at the map, not to mention basic understanding of peculiarities of the Polish market. Thus my job is dead-end, but owing to inertia of overgrown corporations I will hold it down for a while. In the meantime I keep looking for a better one, mindful of the risk of falling out of a frying pan into the fire. As long as I am not redundant, the pressure is limited. And if they decide to fire me, there is golden parachute waiting for me by the end of this year. If it accompanies the lay-off, putting me out of misery looks like an appealing option.

See the difference – follow-up

… to one of my first posts which I published as a third-year student. After two years of working for a huge capitalist corporation, I see more semblances between capitalism and socialism and some similarities are disturbingly striking. The post would not have appeared here today, if it had not been for the violent crackdown on some of my fellow colleagues that took place in the third last days of October. Accidentally the ruthless moves in personnel policy coincided with an e-mail reminding about renewing the commitment to follow the social media use policy guidelines, observance of which prohibits me from revealing my identity and name of my more and more often hated employer…

I have taken the trouble to compare some workings of the political system of 1945-1989 socialist Poland and features of American-style corporate capitalism and within five minutes I managed to discern (and put down on a piece of paper) the following similarities (in random order)…

Brain-washing – in both systems you are told is more or less thinly-veiled way what you should think. Your mindset is shaped by someone who has interest in controlling how you perceive the world, what your hierarchy of values is…

Because efforts to wash brains of employees / citizens go in vain, omnipresent duplicity emerges. Officially people declare one thing, while unofficially they speak their mind and do their bit. In both systems they have to watch their tongues though! Self-censorship is natural in such circumstances. You weigh up every word you say, before something politically incorrect comes out of your mouth You never know who the sneak, waiting to tell on you to their principal, is.

Your workplace, as well as a totalitarian country, is not a place where you should make friends. Individuals are to co-operate with each other to serve the corporation / the system and should be discouraged from any closer interactions. Of course integration (after-work meetings) is encouraged, but its extent is attempted to be controlled. In the corporation one of crucial unwritten rules tells you to pursue your private life outside work. Having committed a sin of violating this rule, I admit there is a profound rationale behind it, but people should be free to pursue happiness their own way.

The two worlds, one real, dejecting and murky, the other full of bright prospects, exist thanks to wide-spread success propaganda, aimed to make you believe how well your company / country is doing. Poland is 1970s was catching up with mid-African developing economies, while official e-mail from the CEO of your corporation will inform you that the company has gained 50 clients, passing over the fact in the meantime it has lost 150 accounts. Censorship is thus not confined to individuals who muffle most of their thoughts, but is applied on much wider scale on the level of corporation.

Hollow words, spread far and wide, are distinguishing features of both corporate capitalism and communism. In pre-1989 you formally had democracy, free speech and other stuff guaranteed by constitution. Your employer promises you work-life-balance if you work eleven hours a day and do not get paid for overtime, instils integrity in you, while senior executive have no qualms lying through their teeth…

Once socialism was described as a system that bravely fights problems unknown in other political systems. The same applies to some big corporations where processes cannot run smoothly, but are impeded by self-created obstacles. This probably has an economic explanation is diseconomies of scale – a corporation which grows in size become too big to manage and turns marginally inefficient. Socialism fell apart because socialist economies had to reach frontiers of development and could not grow any further due to built-in inefficiencies. Big corporations are doomed to fall apart because they focus on themselves rather than on clients.

Dissent… is a crime (not on this blog, comments are highly appreciated). If you think free-market corporations foster ingeniousness, you are under the same delusion I used to be. Firstly, only selected individuals are allowed to come up with innovative ideas, secondly, if their innovations does not turn out to fetch expected enhancements, they are bound to bear the brunt of it. And do not hope for the second chance. In corporate capitalism it is safer to swim with the tide and not to stand out.

Targets are what socialist economy planners and corporate productivity managers are obsessed with. In the socialism there were five-year plans, always exceeded, in a corporations, you have sales target or other targets, depending on your position. Try not meeting them…

A human for a corporation has little value, just as in totalitarian systems. It is just a cog in a machine, an item on, respectively, a payroll or census list. It can be easily swapped for another one, if there is a need, or liquidated, if no longer necessary. A human is subjugated to the overriding goal which is, either the bottom line of profit and loss account, or interest of the system. And end justifies the means.

Recent goings-on at work reminded me of leitmotiv of disappearing people from ‘Master and Margarita’. During the big purge in 1930s people did not know the day nor hours when some ominous men knock on their door and make them disappear without the trace. In an American corporation you come to the office and never know if this is not the last day in your office. On Tuesday I saw head of one of department talking about lay-offs, glad he was not affected by this. A few hours later his job contract was terminated. On Wednesday morning I shook hands with one of the best (meaning having a portfolio of profitable accounts) corporate dealers, the previous day he had agreed on 20% salary cut and hence was sure he would not be given the notice. An hour later he was proved wrong…

Not to make this post one-sided, let’s highlight some differences between the two systems. Socialism offered job security, while in corporate capitalism you can be fired every day and if you corporation claims to be “socially responsible” (what a twaddle!) it can give you a generous severance package. Corporations, unlike socialist enterprises focus on work efficiency and can appreciate those who do the good job. Beware though, if one day you receive accolades, the next day you may be given the sack. I am in two minds about the distribution of income. I lean towards more pointing at bigger gaps between salaries of rank and files and key executives, but in the socialism there also were ‘equal and more equal’ comrades…

Plus note the fundamental difference between firing people and murdering them. In a corporation you are just given the severance pay and are free to pursue your career somewhere else. In a totalitarian system, there is no such things as freedom.

Having written this, I will return to my office tomorrow, with smile put on my face and hoping my position will not come under restructuring, at least this month. Once I heard people living in socialist have experienced so many humiliations, but what about staff of big corporations, exposed to so many similar disgraceful treatments?

The Inside Job - film review

It starts with shots of intact Icelandic landscapes. In early 2000s the country finalised reform of its financial sector, which consisted mainly in deregulation. Until mid-2008 Iceland received glowing praises for the reform, which, as said by economists, strengthened the country’s financial stability and accelerated its economic growth. In fact deregulation of financial institution in Iceland gave rise above all to excessive credit expansion and, eventually, to an ultimate collapse of the country’s banking system.

This is just the prelude to another story told about the recent economic crisis. Clever, bright, yet not leftist and not politically involved. Some claim it does espouse leftists views on economy, but I did not discern it. If the film calls for something, it is surely not a revolution that would overturn the current unbridled capitalism, but for reverting to traditional capitalism, based on freedom, responsibility, playing by the rules and straightforward decency.

The main thesis the film sets out is that the financial industry in most developed countries has been allowed, by politicians and economists, to spiral out of control, then, by means of privatising gains and socialising losses, led to the recent crisis and went unpunished. The work, divided into five parts, explicates mechanics of events and decisions in the run-up to the crisis. I do not know if the way facts are presented is clear enough for a layman, but for me it seems the job has been done well.

Part 1: How we got there.

Filmmakers have come up with a theory that since the end of the Great Depression, until early 1980s when Ronald Reagan was sworn in as US president, the United States did not see any major economic crisis. This success, in fact untrue, since early 1970s saw oil crises, bringing about periods of stagflation, that put the era of Keynesianism to the end, is put down to the strict regulation of banking industry that prevented financial institutions from growing big. It was after Ronald Reagan took over and pressed ahead with his doctrine of Reaganomics when deregulated financial industry began to distend.

Two last decades of the 20^th century saw two financial crises triggered by deregulation – S&L crisis and the dot-com bubble. The former is thought to have been caused by excessive law liberalisation, the latter by simple lack of integrity. The film brings back commonly known, exposed by the press, examples of stock market analysts saying privately the dot-com stocks they had valuated at sky-high prices were just junk.

The end of the previous century brought also much more tie-ups between business and politics. Transfers from positions of CEOs of big investment banks to positions in state administration and the other way round became the order of the day. Number of lobbyists hired by financial industry to protect its interests soared. Belief in self-regulation of the financial industry became an officially recognised doctrine.

Part 2: The Bubble

Around 2000, deregulation was full-blown and any attempts to bring some markets under supervision met stiff resistance from financial industry, backed by officials from FED, at that time chaired by Alan Greenspan, an remorseless advocate of deregulation. One of the proposals eventually rejected around 10 years ago was the one to oversee derivatives market. Personally I’m in two minds about this. Derivatives are like axe, itself good, good when you use to it to chop wood, but evil when you use it to kill your mother-in-law. Derivatives can be used for transfer of risk, hedging and speculation. Two first purposes seem safe, but usually derivatives were used for speculation and this sparked the whole turmoil in the recent crisis.

Those who have never dwelled on the mechanism of mortgage lending in the US in early 2000s are recommended to see the part clarifying how this all happened. The same part brings up the ever-lasting issue of risk vs. return trade-off. So either you grant loans to creditworthy borrower and make safely small profits, or give risky loans and cash in more, as long as they perform. You just cannot circumvent this!

The film reminds that one of the causes of the crisis were flawed remuneration schemes that put emphasis only on performance, regardless of risks taken. Risk-adjusted salaries and loss-sharing together with profit-sharing before the crisis could have mitigated the aftermaths of the financial meltdown.

Very remarkable is the last episode of this part in which a psychologist tries to examine the specific features of a typical banker’s personality. As you would have thought this an alpha male, compulsive risk-taker, inconsiderate, acting on the spur of the moment. Such types were much desired by banks and still are, since only thanks to their bravado profits of banks in good times could be that high and banks did not spare money to finance entertainment for them…

Part 3: The Crisis

Begins with the face of Ben Bernanke and his utterance from mid-2005 in which, when interviewed by a journalist of one of US TV stations, he claimed there was very tiny risk that there was a tremendous housing bubble and found it improbable that bursting of it would plunge the whole country into a recession. Several economist claim to have warned Bernanke of the impending disaster but he would always shrug off those warnings. Deliberately?

His pronouncement coincided with the peak of the housing bubble. The film indicates a direct cause why it burst and it is strikingly simple – the housing market run out of suckers who wanted to buy houses at exorbitant prices and financial markets run out of suckers who wanted to buy securities backed by lousy mortgages.

Then comes another commendably clear explanation of how financial crisis spilled over into real economy. Finally, the makers conclude that, as always, those who suffer the most are not those guilty, but the poorest. The bailout programmes rescued big financial institutions (as an economist I realise it was cheaper to help them out than to let them go bust and the whole plan was purely pragmatic) and left millions of ordinary people unaided. This is again symbolised by empty houses, may this bleak sight serve as a symbol of human folly and may it caution others not to repeat the same mistakes.

Part 4: Accountability

What accountability? Current “crony capitalism” is based on lack of responsibility. Either I win or you lose. What a game! Fortunes of banks CEOs who brought institutions the had run on a brink of collapse are intact. Bankers got away with punishment. If someone went to jail, it was only for fraudulent activities. In 2008 and 2009 correlation between remunerations and performance and financial standing of managed institution was totally disrupted.

The film also lays bare the hypocritical take of financial industry on deregulation. Prior to the crisis they were against, in autumn of 2008 when financial tsunami was about to wipe out the whole industry they called for tighter regulation, and when in 2009 the worst was over again they returned to their previous stances.

The crisis has changed nothing. Financial institutions are bigger and more powerful than ever before.

At the end, the film outlines several tie-ups between renowned academics from best business schools in the US and the financial industry. The study of economics, as carried out by people financed by the industry and who get well-paid jobs there, is described as “corrupt” and indeed conflicts of interests are visible… Should we believe scholars then?

Part 5: Where we are now

I am thankful, again, I do not live in the United States. Level of inequality in the US society is continually increasing, while social mobility is decreasing. In Poland, by sheer hard work, it is still possible to rise from rags to riches. Many poor people in Poland still can afford to get in to university and break away from poverty. In the US it is out of reach. The US economy has made a huge shift towards innovativeness and high-tech. Jobs in new industries require good education which, due to its costs, is out of reach for more and more Americans. In Poland financial institutions are not powerful, their power is as big as it should be, maybe except for Pension Fund Managing Companies, which showed how to defend their interests during the debate on pension system earlier this year.

Filmmakers also blame the “culture of going into debts” for the crisis. Media and financial institutions, as they claim, have incited people on consumption spree, brought them into troubles and profited from their misery. Also limited access to higher education is said to be one of the reasons why people run up huge debts.

Barack Obama’s presidency turned out to be a big letdown for all those who had hoped for the CHANGE. He went back on the promises to curb excesses of the financial industry. European government somehow managed to tackle the issue, Mr Obama failed.

The film ends with a lovely conclusion: Real engineers build bridges, financial engineers build dreams. Many people dreamt of their own houses. Their dreams have turned into nightmares.

Personally I have two main reflections after watching the film.

Firstly, if so many people “declined to be interviewed for this film”, are their consciences not clear?

Secondly, I could not resist the impression that many people who agreed to be interviewed mastered lying through their teeth to perfection. This is an immensely useful ability in the contemporary world. Sadly…

Who's to blame for the crisis, part 2

Exam period report: two down, seven to go!

First days of the new year turned out particularly conducive to various musings about economics. Several questions have been running through my head, but they all have one common denominator…

Did US politicians think increased home ownership ratio would solve social problems and make many poorer US citizen happier?

Did Alan Greenspan think pursuit extremely loose monetary policy that eventually sent property prices soar would bring Americans closer to fulfilling their dreams?

Did mortgage borrowers who could not stand any chance to repay mortgages off their income think they would refinance their loans endlessly thanks to ever-increasing property prices?

Did “financial engineers” think Gauss-Copula would work miracle and turn subprime loans into prime securities?

Did David X. Li. think if one subprime mortgage is a lousy underlying security, two subprime mortgages are two lousy underlying securities, ten subprime mortgages are ten lousy underlying securities, then million subprime mortgages bundled together and packed as Mortgage-Backed-Securities would make up triple-A securities?

Did credit portfolio managers at banks think they could push away the credit risk from their balance sheets through securitisation and did they think it would not return to them?

Did risk analysts at banks think they would always recover principals and interests on subprime loans through foreclosures and selling houses on the market at higher prices?

Did shareholders of those banks think focusing on short-term profit was a sound growth strategy?

Did governments and regulators think greed could, in long run, do more good than harm?

Did market participants think they could reap an extra profit without taking an extra risk?

Did CFOs of Polish companies which speculated on currency options think they had just discovered a gold mine?

Did borrowers who had taken out mortgage loans denominated in foreign currencies when zloty was overvalued think they had stroke a great deal?

Did grannies who bought stocks or invested in equity funds think stock prices could plummet in the coming months?

Did Greeks think living beyond their means would sustain economic growth in their country?

Did Irish home buyers who bought properties despite steep prices think the prices were still reasonable given their growth potential?

Did pension fund managers from all over the world which were buying summer houses on Spanish coast think the demand on them in the coming years would be so high that it would drive prices even higher?

Did Ben Bernanke think keeping interest near zero would kick-start the US economy?

Did analysts at the end of 2007 think stock indices would fall by roughly 50% in 2008?

Did PiS, Samoobrona, LPR and PO think by raising spending and cutting taxes and sickness benefit contribution they would turn around Polish public finances?

Did Polish airlines managers think oil price would rise to 200$ per barrel and hence purchased future contracts at 150$ per barrel (they had to pay so much when prices dropped to 40$)?

I could flog the dead horse and reassert they all took it for granted that nothing could go wrong. Or, alternatively they knew everything was goings to collapse, but they thought they would escape the disaster?

In July I tried to park swiftly in front of my house. I did not manage to manoeuvre properly and smashed into the fence. It ended up with a dented bumper. I did it because I thought would simply make it (today at home we recalled that accident after my father dropped his mobile phone into the toilet bowl). But three months earlier pilots of a plane thought they could, or rather should, or even had to touch down the plane despite thick fog and poor communication with air traffic controllers. They thought they could, somehow, make it. They did not. 96 people died.

I will not dare to pass judgement about the causes of Smolensk disaster, but the dented bumper was a result of nothing but my own thoughtlessness.

The ongoing crisis does not just have one, financial, facet. As outlined above, this is also the crisis of thinking, or a result of years of thoughtlessness.

Almost a year ago I drew a conclusion that the crisis was caused not by greed, but by lack of fear. Now another conclusion – the crisis was also caused by LACK OF FORETHOUGHT…

Or maybe... Did they think, or did they believe?

Labour day after-thoughts

I spent the entire first day of May strolling around Warsaw, serving as a guide. In the early afternoon, at the corner of Nowy Świat and Al. Jerozolimskie my guests and I ran across one of the May Day marches organised by leftist organisations, lunatic-fringe parties or trade unions. As far as I know there were a few demonstrations in Warsaw on that day. The event we kept away from and just watched by could have sparked off a ferocious row over the political views, but I managed to head off that possibility and no one fell out over who to vote for and against, nor whose vision of Poland is the only right.

Apart from seeing the next divide lines I could discern my views, though still in a state of flux, have crystallised and I developed some gut reactions to some certain types of rhetoric.

According to what I’ve read later on the website of Gazeta Stołeczna, the demands of the protesters were the following:

1. Every woman and every man should have a right to pension off after respectively: 35 and 40 years of working. This actually means if they enter the labour market at the age of 22 (on average) they would retire at the age of 57 (women) or 62 (men), so earlier than now. But thanks to the advancement of social welfare and better quality of healthcare, technological development etc., they will live longer than their parents and work shorter. Who will pay for that? Just one question, but makes a considerably big crack on their demands.

2. As Mr Careerist Napieralski pointed out, Poland is still far from the welfare standard old countries of European Union stand for. Which countries? Germany, which is struggling to carry the burden of ageing society? France, paralysed by strikes whenever unionists don’t get a pay rise or when someone brazenly tries to extend the 35-hour workweek? Or maybe Greece which is paying the price for its welfare standards?

3. Some demonstrators trotted out the old buzz-phrases, such as: “the rich should pay for the crisis”, or “it’s your [employers’] crisis, not ours”, “Greek strikes show us the way”. Now let’s face it – the crisis had its roots in the USA and not only bankers are to blame, but also the subprime borrowers who took out loans they would never have stood a chance to pay back. And it is our crisis, also mine, because the labour market will not be as brisk as it used to be in 2007 or 2008 and I will not enjoy such career opportunities and will not be paid as generously as a few years older graduates of SGH. But if they trade unionists think their employers should bear the burden of cost-cutting, lower demand and pay claims on their own, then good luck and strangle your companies to death. It is easier to have a lower salary and make and ends meet or to live off social security? Maybe the latter, at least they don’t have to wake up and work for eight hours every day.

4. Not surprising were the calls to stop exploitation, comparing capitalism to cannibalism or even ideas to set up a Polish Soviet republic..

The common denominator of the claims above is economic illiteracy. There are some rules you cannot circumvent, like the simplest one, that if you don’t work for something, you don’t get it. Even you don’t work but grow richer it is because some else pays for it and you are sponging on them. Working less and getting paid more is like having a cake and eating it – not that easy in reality.

Alright, but let’s tackle the problem from a different angle. Why trade unions exist? Their origins can be traced back into the first half of nineteenth century, when they really had to fight for civilised working environment and human treatment. The creation of trade unions and emergence of socialist movement was a natural aftermath of primeval capitalism. These days in the companies where workers are treated decently and paid well nobody thinks about membership in trade unions. So the key to the door is to treat employees fairly. At least those well-educated will pay you back by not hampering your life.

On the other side of the barricade employers have their associations which pursue their goal. If trade unionists want to work less and get paid more, the employers would prefer to have their employees work more and pay them less. If both groups are to outwit each other, they will get nowhere.

In the evening I saw a coverage from street riots in Athens. The first thing I spotted was a policeman set on fire by protesters. As a child I saw accidentally a man ablaze and such a sight will probably always be traumatic for me. But hang on, how inhuman and cruel it is to set fire to a fellow man and watch him burning? It is beyond my comprehension that such uncivilised nation is in the European Union. They resorted to lies to enter the eurozone. Lies, blatant lies, statistics, Greek statistics, will it get worse? Now when their country is on the brink of bankruptcy instead of humbly getting down to work to lift it up they take to the streets. Ruling elite is to blame, but I have no sympathy for the ordinary Greeks who appear as coarse rabble.

So what can be done for the poor. The Labour-day protesters want more redistribution. I opine no redistribution, but the low-paid workers should not pay income tax and other quasi-taxes employers withhold. Currently a company has to spend around 2,000 PLN on an employee who gets paid around 1,300 PLN net. And if they got paid 2,000 or at least 1,800, wouldn’t they be better off? Socialists want higher taxes for the richer, “typical” liberals want lower taxes for the richer, I want lower taxes but mostly for the poorer. For my ideas of tax system click here.

There are also proposals to abolish the Labour Day as a relic of PRL. As many Poles I am against, not because I care about the marches, trade unions, etc. As many Poles I want to make the most of long weekend and the gust of spring warmth. Additional day off is a good occasion to cycle, take a trip, have a barbecue, work in the garden and for many other outdoor activities!

Ukraine, shock doctrine

Following the discussion on Polish winter, I report the gas bill has arrived.
Period: 20 November 2009 – 19 January 2010
Gas used: 628 cubic metres (just 21 metres more than in the same period a year earlier)
Amount payable: 1111,70 PLN (after adjustments 900 PLN apportioned to heating, the rest to water boiling and cooking)
Usable space heated: around 120 square metres.
Is it really a lot? My father counted up the costs of heating a 60 square metre flat five years ago and he worked out heating a two times bigger house costs after five years (meanwhile gas price and other charges rose) costs only fifty per cent more.

The winter doesn’t seem to break its back soon, the harsh weather may also put many Ukrainians off going to the polling stations today, when a run-off in presidential elections is held. I pondered upon those elections, as I still remember (finally I’m old enough to remember something) the Orange revolution in 2004 and kept track of some current news from Poland’s eastern neighbour and I came to a simple conclusion: Ukraine has not grown into democracy yet. And I’m not sure whether it will ever grow. Heritage of the past has left its mark on its people and it is being passed on to next generations.

To back my theory I see two key reasons why the country got where it now is. Firstly, its elites. People pinned hopes in them over five years ago, expected a big change. Meanwhile in a country with poor institutions a change is beneficial for a small group, the rest might feel disadvantaged. The elites soon relished on power and privileges and began to embroil in spats within their structures (note the same happened in Poland in early nineties within Solidarity structures). In a poorly developed countries being in power means access to privileges and money, or to put it simply, corrupts the governors. In highly developed countries and mature democracies it is a distinction, a proof of social trust, a position which crowns one’s accomplishments and career. Being elected means not a chance to establish oneself in a cushy job, but a public service. It seems to me this is why deputies, ministers and other people holding high positions in state administration should take those offices for reasons other than financial, i.e. social status, fulfilling one’s ambitions, prestige, going down in history, etc. In Ukraine, the premises were different.

The second cause are the people. Firstly shaped by seventy years within Soviet Union, secondly lost and often unable find their ways around independence. They wanted democracy and liberty, but those were not the politicians that made them hanker after the advantages of the previous system. It was the economic crisis that heavily hit the country. The misery is best illustrated by figures of economic growth (over minus twenty per cent year-on-year in 1Q 2009) and depreciation of hryvnia. If people can’t make ends meet, they’re more interested in bread-and-butter issues than in free speech. Crises usually are the times when populists’ popularity grows. Remember that Hitler was elected in the time when Germany was in the doldrums.

I thought reading the passage (pages 171 – 184, English edition) about transition in Poland in Naomi Klein’s Shock Doctrine would unveil some conspiracy theories, facts kept in the dark, give some food for thought. None of the above. A reader unfamiliar with history of Poland in 1980s will find there a timeline and overview of the most important political events that led up to the collapse of communism in Poland.

Mrs Klein drew a parallel between political changes in Latin American countries and in Poland. Her point that the shift to democracy was prompted by decaying economy is quite right. I personally think the regime decided to share responsibility for the country in the moment of ultimate collapse. The regimes which had ruled Poland for forty five years of real socialism had indeed been mismanaging economy and the breakdown was inevitable. Our situation was different than the one in South America. Those countries were not, like Poland, in Soviet sphere of influence. The last opportunity to reform Polish economy painlessly was wasted in the middle 1970, when the extensive growth of socialist economy reached its limits. Then problems were exacerbating. In first years, until 1979, authorities managed to cover them up, then they became too clear to be unseen. The change, however, was not possible, as I claim until 1985 or 1986 when the communism in Soviet Union showed first signs of thawing out, but at that time Polish economy was in a harsh decline plus social indifference thwarted possible reforms.

Was Poland in a great position to accept the shock therapy? It’s hard to say now, the worse the state of our economy was, the more painful bringing it back to order must have been. But watch out now. Poland was crippled by what influenced the situation of Ukraine. The transition, aimed at liberalisation and privatisation was not focused on institutions. Had the rules of the game been clearer and more transparent, we wouldn’t speak now about fortunes springing within a few weeks and about abrupt impoverishment. Poor institutions are, as I observed one of major causes of growing inequality. Milton Friedman, in his declining years said he had been wrong. The major reform that should have been carried out in post-socialist economies was creation of sound institutions. With good institutions established, privatisation wouldn’t have been so slated these days.

Somewhat interesting is the comment on the attitude of Mrs Thatcher and Mr Reagan towards Solidarity. This movement, in its line extremely leftist would be clamped down on in Great Britain or United States under their rule. In 1980 and 1981 Solidarity wanted to turn Poland into democratic socialist country, based on collective property and governed by workers and trade unions. How Poland changed ten years later was far cry from this vision. Actually I see linking Solidarity from early eighties and its contribution to economic changes misplaced. What the movement fought for and what was put into practice was political liberalisation.

Is the entire book worth reading? I haven’t got a clue. My lame excuse for not reading it now is that this year’s winter break is so short…

The capitalism, taken apart

My big thanks to professor Marek Garbicz from Warsaw School of Economics for a big dose of factual knowledge and critical approach.

I appreciate every opportunity to come up against the wacky or peculiar outlooks on the economic system. The extreme examples, both from the right (in economic terms the radical liberalism) and from the left (socialism, verging on communism) sometimes make me laugh, sometimes infuriate, but they are the most valuable, when they bring me on to reflections or egg me on to gainsay them. In Polish, there’s a adage that says the truth lies in between. In truth, it lies where it really lies and nowhere else.

This time we’ll dwell on the contents of “Let’s Make Money” film, released in 2008 (in Poland in 2009, at cinemas from September). Unlike many of such films it hasn’t been shot by an American leftist intellectual, but it’s a work of an Austrian director.

In brief, it’s a bit longish attempt to harp on the vexed questions of development economics (Why do some countries develop faster than others? Why are some of them rich and the other poor?) and more or less deft depiction of the impact the globalisation has on different countries.

The most apparent is the issue of beneficiaries and losers of the process. The world has been ruled by the superpowers for centuries. They arranged it, set the rules, conquered new lands, competed against one another, shared their spheres of influences. In the twentieth century they set up organisations, aimed at maintaining peace, rule of law, democracy and for economic stability. I’m not naïve, I lean towards the view of Adam Smith, who said people are driven mostly by their egoism. Well-developed countries will firstly pursue their own interest, just later on they’ll mind the performance of poorer countries, whenever it’s advantageous to them. For instance, if a poor country is abundant in natural resources or they could profit from trade partnership.

What can be done to help the poorer countries grow? Can they catch up with the most developed ones? Is the convergence hypothesis true? If I can suggest anything, look at the development as on a dynamic process. What underlies the current economic situation is rooted in the past and can be dated back to renaissance era. Those countries which are better equipped in physical capital, human capital, knowledge and institutions (what in economics means “rules of the game”) have a head start, so maybe a divergence instead?

There are many schools of handling economic growth.
Firstly, a separation from the world economy. It didn’t work out, as the technologies in the countries where it had been implemented had been too poor.
Secondly, an export strategy – boost your exports, prohibit imports, protect your own industry, fight through competitiveness. This approach has been rather successfully adopted in the East Asia.
Thirdly, one in line with Washington Consensus, followed also by Poland, time will tell if it was a correct decision, now it’s still too early to judge it.

The third one is (as the wikipedia entry also shows) the most controversial. For me, its assumptions are praiseworthy, only officiousness in the implementation can wreak the economy. The film points at four aspects of Washington Consensus recommendations.
1) Deregulation – which is generally beneficial is the policymakers don’t make one step too far. Hence, there are the justified fields, where a certain dose of regulation is essential to preclude a bigger disaster.
2) Liberalisation – in the long term favourable to everyone, but the film director points out that unconstrained capital flows are the biggest evil. Indeed, the speculative money is used to make more money and its contribution to tangible output and social benefits from liberalised capital markets are tiny.
3) No state intervention – here they misrepresented the assumptions or followed the visions of some market fundamentalists. State’s activity should stimulate growth, draw in foreign investors, so the education or infrastructure provision shouldn’t be handed over to private sector. Even the early night-watchman concepts (as the first one, by Adam Smith) postulate active role of the state in these fields.
4) Privatisation. Quite important, but not the most. Even Milton Friedman, who twenty years ago advised to privatise, privatise and privatise, in the last days of his life admitted the most important role in the transitional economies should’ve been played by institutions. What lack of good rules of the game means? Just look at the example of Russia – mob and oligarchy (or state) have a hold over the country’s richness.

When is a privatisation good then?
- When state property is not sold in haste.
- When the rules (tenders, etc.) are transparent.
- When state property is sold for decent price.
- When the industry will be more efficient after turning private. It’s a paradigm, but how about the markets when there’s room for only one supplier and every citizen is obliged to consume them, like waterworks, sewerage. The state enterprise is likely to be run worse, for some built-in reasons, but, if provided by law, it won’t be profit-oriented, so it will deliver more goods at lower price.

“Buy when the blood spills on the trading floor”. What’s so reprehensible in this approach? Every speculator knows the best moment to buy is when the stocks are undervalued. Those who spotted a turning point in February or March won! When should we buy then? When the bull market ends? Someone has to do it, but those are mostly the small, inexperienced investors, who join the game when it’s actually over. It don’t get where the authors of the film saw the cynicism of that statement.

“Three million empty flats and houses on Spanish coast”. The property bubble grew robust in Spain, real estate prices would go up by more than twenty per cent per year. Investments in real estate are considered safe and profitable, in the long term. Long term profitability is one of those entrenched dogmas. Investments in stocks are according to the past data the most profitable – you’ll hear it from any financial advisor (they get the highest commission when they sell products linked to equity investments). Why then, some economists (like prof. Sławiński) easily undermine this assertion by pointing out that in the long term the probability of a big bull market is higher?

Back to real estate – I’m wary of this kind of capital investment. The reason is simple – every man needs a dwelling, but the speculation drives the property prices up and makes them unaffordable for many people. Much depends on the source of the speculative capital. If like in Poland between 2005 and 2007, prices soared because of domestic demand, situation is not that bad. In such a scenario, domestic demand is stimulated by low interest rates and liberal credit policy, what leads up to what the author of this blog has devised and described as “affordability paradox”. Let’s consider the following example. A buyer wants to buy a flat which costs 200 000 zlotys, but he has amassed only 120 000, what stands for 60% of the price. Creditworthiness criteria are tight and he cannot get a loan, he has to put aside money, the money he saves still works on the compound interest principle, some time later he can buy a flat without running up debts. But there’s a catch. This reasoning is correct only if the restrictions on access to credit are not lifted. If it happens, the same flat may soon cost 400 000 zlotys (the better access to mortgage loans has created additional demand) and our buyer can afford to buy that flat, even though it’s two times more expensive. A lot of economists claim everything’s alright. Prices are higher but he can afford a flat. But who sees a burden of a huge loan which will be being paid off for twenty five or thirty years? Repayments will decrease his discretionary income, so he will consume less for all that time. The credit is sometimes ball and chain – what if Mr buyer loses his job or his child goes down with an illness which would require a costly therapy? Would a bank take into account his unfavourable situation or would it foreclose his flat and turn him out?

In Poland, I’ve heard many times that flat prices are prohibitive. Indeed, five years ago, a person with considerable, but not very high savings could afford to buy a flat or house without taking out a loan, today it’s hardly ever possible. In Berlin, a square metre of a flat in a panel building block, similar to many in Warsaw, costs around 800 Euro, in Warsaw, on average two and a half times more (let alone the purchasing power of a Berliner and a Varsovian – I wonder how many square metres of a flat in a high-rise from the eighties can the former and the latter buy for their monthly salary). The price in Berlin probably reflects the intrinsic value of a property. In Warsaw the prices have been put up both by insufficient supply and excessive demand.

Back to Spain, those flat and houses, all in luxurious estates, in the prestigious coastal areas, are uninhabited. They were built and bought not to be dwelled, nor even to hire, but to earn on their growing market value. Any asset that should fetch a real profit has to be cashed in, so those who sold their properties off to the other fools, raked the profits in, the ones who bought before the bubble popped, were left with useless flat in Spain. Meanwhile millions of domestic buyers found the real estate in their country unaffordable – they were the victims of speculation… In a few years, property market will get back to its equilibrium. The huge supply of empty flats will bring the prices down and they’ll be bought sooner or later for a reasonable price.

And finally the tax havens. I strongly believe the existence of such spots stems from the common perception of the taxes, not only from greed. For centuries they have been perceived as the biggest possible evil, tax avoidance has not been treated as misdemeanour, people have sought ways to reduce their taxable incomes, what led to many absurdities. Before the Poland’s accession to the EU, many firms were inflating their costs, just to have a smaller profit and a smaller tax. Then, when they put in for grants from the EU or for bank loans, their applications were rejected, cause nobody wanted to finance unprofitable businesses. Few people realise that what they get for paid taxes are public services like infrastructure, education, health care. The other point are the costs of redistribution, its justice or effectiveness, let alone the quality. But the fact is that we get something from the state. Nothing’s for free, but some crafty fellows try to take advantage at the other’s expense, this is called free riding.

But look at it from the tax haven’s perspective. A country attracts zillions and even if taxation rates are very low, the revenues they take are not to be sneezed at, so that they can fare very well. On the other hand, the money taxed in a tax haven is not collected in the country of its origin. Consequently, the budgets of those countries the capital flees suffer, governments run up higher debts which will have to be paid in taxes by the next generations.

At long last. THE END.