Why isn't everyone rich?

People have a really fucked up relationship with money.

People also have a really fucked up view of those who have a good relationship with it, or worse, those that don't.

'YOU'RE BORING, YOU'RE STINGY! LIVE A LITTLE, I CAN'T BELIEVE ALL YOU CARE ABOUT IS MONEY.'

'HAHA YOU'RE BROKE, SHOULD PROBABLY STOP BUYING LATTES EVERY DAY.'

'NO ONE SHOULD BE A BILLIONAIRE, THEY DON'T DESERVE IT.'

Let's give the Macrodesiac opinion on money...

What it is, how it works, why you should care, and why you should be less pissed off at 'money'.

Imagine it's the year 41,000 B.C.

You look like this.

Someone who works in a coffee shop in Shoreditch or West Village who has a tattoo of an anchor on their arm and wears vans with their jeans rolled up?

YES!

That kinda person is pretty similar to a Neanderthal, but for the purposes of this piece, I'll chill out with the attacks on hipsters.

In the Neanderthal era, money didn't exist.

Everything was hunter gathering and quite insular, as in, if another tribe were seen, they'd probably throw spears at them then cook them to eat.

As time moved on, humans popped up.

We developed the ability to communicate, to work together, and to be identified more as a cohesive species.

We found that there is a benefit to pooling resources and working out how best to distribute said resources.

Hunter-gatherer Neanderthals were more focused on simply, well, hunting and gathering.

They probably didn't have the capacity to pool resources together: to trade.

There were tonnes more factors leading to the demise of the Neanderthal.

I mean, humans will probably die out one day and be replaced by some other primate like species, that is quicker, smarter and more robust.

Or not.

I have no idea, I am not an evolutionary scientist.

But it does set the scene for why money isn't the root of all evil, and why thinking so will never lead many to being rich - FWIW, I would say I am a HENRY...

High earning, not rich yet.

I'm only 28, so I think that's allowed... and perhaps my definition of rich is skewed (I would like to be able to get up and go wherever I want in the world in an hour, but I can't yet, so not rich).

Mine! Yours!

In the old trading pits of the LIFFE floor, the CBOT and CME, NYMEX and NYSE (and all the rest), there were slang phrases for buy and sell.

Mine = buy.

Sell = yours.

A conspiracy theory: The Chuckle Brothers were likely ex-traders on the LIFFE floor, doing some kind of collusive wash trading.

Trading takes place with capital: money.

Most traders would never actually take physical delivery of the commodities products they were dealing with (no trader wants to store a tanker of oil, they just want to make money), or become a long term investor in the companies they bought shares in (conversely, they probably weren't long term sellers of the companies they bought either)...

Instead, they were buying and selling based on need and wants at the time, but all facilitated through a universally understood means of exchange: money.

This is vastly different to the early human species.

Let's travel back to BC times, where money didn't exist.

I am good at cutting down wood.

I'm big, strong, and have great stamina, (a far cry from what I actually am like at the moment, but indulge my fantasy.)

I have loads of wood.

Let's say my mate Andy is good at fishing.

But his wife, Gertrude, is also a lumberjack.

She's also pretty good at cutting down trees, since she looks like a Viking - I don't know why he's with her.

I need fish, but Andy and Gertrude don't need my logs.

I'm tired, hungry and close to death.

There are a few different options.

• I go and fish for myself. The risk here is that I am crap at it, don't catch anything, and die from starvation.

• I find something that Andy & Gertrude want to swap for fish. Again, I'm at risk of starvation so I look like a crisp.

• I work for Andy and Gertrude so they provide me with fish.

The problem with all of these methods is that there is big opportunity cost, since I am swapping one activity that I am good at, for another, to obtain something that I need.

You must also be constantly finding demand for the good or service that you have specialised in to trade for something that you want or need.

That is...

To put it succinctly...

Long.

The bright idea: what if there were an understood means of exchange which meant you could make something, receive payment for it, while getting rid of the need to have something that the person buying from you wants to satisfy your want or need?

Here you have it: money.

It's a love/hate thing

What I find amusing about the chatter surrounding money is that everyone loves it, hates it, needs and wants it.

There is a distinct lack of understanding about the role it plays though.

It is a medium of exchange.

Some people have more of it than others.

Where people do not undertake the risk of looking to earn more, they likely won't benefit from it.

Of course, where this lack of understanding comes in is with the involvement of institutions...

The Behavioural Insights Team, a think tank that looks at... behaviour, studied three different groups of people and their understanding of the Bank of England's monetary policy statement.

When shown the statement as is, only 12% of people could get four or five questions correct when they were asked about understanding what was said.

That moved to 26% when a visual interpretation was provided...

And when it was made relatable (like what our job here at Macrodesiac is) that jumped to 36%.

Only 12% of people had a good understanding of one of the most important aspects affecting their lives: their money.

Displays of misunderstanding financial and economic topics shouldn't be unexpected then.

But if we hark back to our bartering ancestors, something becomes glaringly clear that is linked with money.

Risk has become a dirty word

Hunter gatherers would have to risk their lives simply to, well, live.

These days, if you talk about risk with certain people, they immediately start shouting about capitalism and the Great Financial Crisis...

About billionaires and all this other nonsense that is a massive outlier, whilst disregarding the more 'normal' returns from risk taking.

And they immediately associate risk as a word which means 'avoid'.

I tend to ask them, 'OK, well what risks have you undertaken to be able to earn more?'

'I work! That's a risk.'

'Your salaried job is a risk, is it? Where all you have to do is turn up and perform, perhaps, to 50% of your total effort and still get paid at the end of the month? Where your employer matches your pension, and all you have to do is not fuck up to be able to pay your bills? There's nothing wrong with that, but I don't understand your dislike for risk.'

'You don't pay enough tax!'

'OK.'

Well, this conversation has never actually happened word for word, but taking references from multiple people that I have argued with (wound up) on Twitter would lead me to believe that this is certainly a line of thinking that is common.

Being entrepreneurial should be praised, but instead, it seems to only be celebrated when you haven't made it amongst large parts of the youth...

When you're in the bootstrapping phase, burning cash and trying to find the big winner.

Everyone loves an underdog and a trier, but only entrepreneurial success and successful risk taking can build an economy to help everyone.

And as I said above...

There is NOTHING wrong with working, and that in itself can be entrepreneurial a lot of the time.

Even public sector workers, who are paid from private sector tax take, can be entrepreneurial.

But moaning about the system of money, without understanding risk or money itself, is ridiculous - and that is really what should be derided.

'They perpetuate a myth that hard work equals success'

The 'they' here is rich people.

And quite frankly, I don't buy that this is true.

See, back when we made things en-masse, whether in the US or UK (or whichever western country you come from before it became far cheaper to produce in the east), hard work meant the more you produced, the more demand you could supply...

Especially in the post-war boom era.

It had some basis then, but not necessarily now.

What is perhaps right to say is that working hard on the right things can equal a greater chance of success...

And I say 'greater chance', because you never get to see the many failures before that successful risk taking endeavour.

So there is survivorship bias at play.

And without viewing success through the lens of survivorship bias, you end up getting shitty takes about successful founders and owners of firms (many founders are indeed absolute wankers, but they have met demand, so them being a wanker doesn't take away from the company's success) because the perception of risk taking is massively skewed.

Let's talk about this guy...

This is Charlie Mullins.

He's a Remainer, so a bit annoying, but for the purpose of what we're chatting about, he's a great example.

Charlie runs Pimlico Plumbers, a firm set up in London in 1979 to do, you guessed it, plumbing.

Starting as a one man band, Charlie set out to change the perception of the plumbing business.

Hearts and minds, guys: Even something as simple as wanting to have a certain perception can be a unique selling point - everything is about narratives...

Just look at Apple - they don't make the best products, but Apple fans are sucked into the narrative of simplicity, a clean product and almost a cult like desire to see the next release.

Charlie started expanding slowly, increasing office space, hiring more plumbers to work for him and increasing the fleet of vehicles to service people around London.

Even though the business was expanding organically, in 1990, no bank would give him a loan...

Running out of capital is a dire situation to be in when you're looking to grow, so for many, that could constitute a failure and the idea gets thrown in the bin.

Instead, he kept going.

Now, Charlie could have, right at the start, simply worked as a plumber, earning a salary and going through the motions.

Instead, he wanted to broaden the scope of the biz, keeping the phrase 'doing the right job, at the right price, at the right time to suit you' at the forefront of the business' ethos.

The company now turns over about £43 million, employing ~350 people.

The components to Charlie's success: a desire to scale, wanting to break the public's misconceptions about plumbers and formalising the occupation of plumbing.

What isn't told about the rise of Pimlico Plumbers is all of those small setbacks that would have been there on the way.

These come with risk taking, and whilst they are certainly going to come, outsized rewards will come along too, as long as the other components of a good probability of succeeding are there too.

Again, let me be clear here.

I am not saying that employment is a bad thing AT ALL.

I am simply trying to explain differences in risk.

When you are employed, you are not deploying your own, or investor, capital in order to generate more.

You are deploying your time and skill in return for a salary which was agreed at employment.

When people argue that workers should get a share of the business, the first thing that springs to mind is,' well, they do... wages are paid from margins earned on goods and services sold, even more when the employer matches a pension.'

Next, I say, 'if a worker deployed money into the business, they would become a shareholder, which they are totally free to do, to earn a dividend.'

I personally wouldn't do that, since there's correlation/zero diversification risk there - working and investing into the same business (without being handed shares, might I add) is a bit mad, but still, the option is available.

That is a risk taking endeavour, since you are looking at a potential loss of money, but with a view to earn more.

Anger is severely misplaced

If you've been with Macrodesiac for a while, you'll know my stance on housing and land...

Live shot of me beating the Georgist drum...

My view is that all of our issues (not an overstatement) stem from land prices being too high and that the way to fix this issue is to tax the land, tax income at zero and considerably lower capital taxes.

Georgism makes the most sense: Click here to read Henry George's Progress and Poverty to make sense of this. I have critiques of it, but out of all socio-economic ideologies, it makes the most sense.

Of course, this is a pipedream since people are in bondage with the idea of property as an investment, but it is always nice to have pie-in-the-sky thoughts.

Consider that shelter tends to be our largest cost, with many people spending 50% of their income just on renting.

Even if wages didn't increase, but your largest cost did, you'd be better off.

You'd have more money to take on risk.

How much money you have after costs (disposable income is essentially profit) is the real part that needs improving on, not pissing about trying to solve one side of the equation and punishing risk taking activities.

Remember: risk is no longer a dirty word. You've got to learn to love risk.

See, without trying to figure out how to subdue land price speculation, we will always get capital flowing into land as an unproductive means of capital accumulation - basically, it gets stuck and isn't spent on things that have a greater chance of increasing growth.

The investment magnitude simply isn't there with mere trickles of cash, but there is a chance to grow nothing into something for sure.

But, by letting people keep more of their earned money and reducing their main cost, surely that's a better way to incentivise more risk taking, rather than taxing business capital more, which ends up actually affecting the worker or consumer themselves?

And for me, risk taking provides an avenue for purpose, outside of family or helping people.

It's an avenue for being able to achieve.

I'll be very fair and say that I don't think anyone sets out to be despondent towards their future.

Rather it's a forced hand due to the combinations of big institutions, central banks and a safety net of deriding politicians for their every move, some warranted, but mostly not, when referring to the economy being weak.

The price of risk

I mentioned a term above in the example of the lumberjacks and fisherman...

Opportunity cost.

That is what everything boils down to.

'If I wasn't doing this, what else could I be doing and would it lead to a better or worse outcome than the current activity?'

This is trading in a nutshell, really.

You're looking for the best place to park your money at the current time with all information considered.

The biggest problem here is that measuring the true cost of opportunity is impossible.

You might have seen this Greek letter if you've done maths to a higher level before: Ɛ.

For 'epsilon'.

In mathematical models, this represents basically all of the variables that we don't know.

The Great Financial Crisis partly happened because of this.

Banks didn't take into account the information outside of their models to measure risk, which led to everything going tits up.

In business, hiring someone contains an error term, since you don't actually know what they'll be like as a worker, whether their references are a pack of lies or if they're just a great interviewer.

So what do we really mean by risk taking?

You'll be comforted to know perhaps, is that...

No one really knows what they're doing.

Everything comes down to trial and error.

Again, if we think back to survivorship bias and the types who criticise capitalism, they are probably seeing perhaps 1% of successes and missing out on the many, many failures, whether by those who have succeeded or not.

I mentioned on Twitter yesterday that it seems to be graduates coming out of university, who have learnt how to only 'be right' speak out against capitalism and building a business...

Risk doesn't work like that - it's a constant effort of trying, failing, learning, and trying again.

When you were four years old and were learning how to ride a bike, did you expect to get it the first time?

No.

It's the same with risk taking.

Trial and error.

We are simply trying to come up with our best guess as to what decision to make next, some more impactful and important than others.

This goes for your billionaires ('shit, if I buy this firm, I might only make a return in 10 years. I could just buy Bitcoin instead'), your man in a van who's off to pick up a washing machine to scrap (or should he stay at home because the petrol cost and chance of a tire blowing out could be more costly), or your employed person who is thinking of changing jobs but worried that the increase in pay might mean longer hours and less time with the kids.

We are constantly making decisions, sometimes consciously, sometimes subconsciously, about opportunity cost, and it does tend to revolve around one thing.

Money.

Money is what allows us to do things.

Perhaps we want to say that money has improved the liquidity of activity, the same way the internet improved the liquidity of information.

Yes there are downsides to it, but without a common means of exchange, we would be stuck in the Dark Ages.

And without something being risked, there is the chance that we would just be Neanderthals.

A by-product of risk

Most entrepreneurs don't set out to become rich.

Most set out to solve a problem; to solve a demand issue.

Since money is the common means of exchange, they are rewarded with it for undertaking the risk of solving a problem, when they could have had the security of a job.

Obviously, many fail (remember survivorship bias) - 29% of businesses fail because of bankruptcy.

Wanna hear of some entrepreneurs and companies that went bankrupt, or near to, before making it?

• Walt Disney

• Henry Ford x2

• Duncan Bannatyne

• Peter Jones

• Stan Lee

• Milton Hershey

• Apple

• Converse

• James Dyson and his 5000 odd prototypes before he had the one that worked

But many laws and regulations are set up to promote entrepreneurship.

Bankruptcy protects the entrepreneur by not totally obliterating their lives, allowing them to try again.

Limited companies also aim to do this - they are limited because the liability is constrained to the business and does not fall on the directors (in most cases).

So taking risk on is clearly something that governments want people to do, even if their own policies create constraints on doing so.

And failure isn't something to be ridiculed.

It's purely trial and error.

And the sooner that those speaking out against businesses actually try to start one themselves, the more I might take their opinions seriously.

It is this misunderstanding of risk that leads people into the anti-capitalist narrative which, despite its many flaws, is the only want to be able to enable innovation and improvements in quality of life.