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The Road to Recovery: How and Why Economic Policy Must Change
The Road to Recovery: How and Why Economic Policy Must Change
by Andrew Smithers
Edition: Hardcover
Price: 12.72

5.0 out of 5 stars Flawed, but daring and essential, 7 April 2014
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This is perhaps the first sensible, non-sensationalist book that has been written to highlight that in the absence of new policies the current economic slump is here to stay. As usual with great books, while nothing fundamentally new is presented, theories that have existed for a while are combined to further our understanding of the world.

My favorite book of 2013, Stockman's "Great Deformation," argues that the financial crisis was caused by the lethal combination of three factors that in isolation could have been benign: (i) the tax advantage of debt financing over equity financing (ii) the tax advantage of income from capital gains over income from labor and (iii) the Fed's perception of its role as that of a guarantor of prosperity leading to permanently loose monetary policy. These factors, Stockman argues, combined to fuel 1. Corporate Equity Withdrawal in all its forms, from the Tyco, Enron and (dare I say it) GE and Cisco-style acquisition, creative accounting and profit management cultures that centered around the worship of the stock price, to the Private Equity bubble that has left North America with (just for example) 5% of the world's population but 42% of the world's hotel rooms (you can borrow against a hotel room) and tons of healthy companies disemboweled at the altar of current shareholders' short-sighted, narrow interests and 2. The Private Equity Withdrawal fest that was the 2000-2008 GSE / mortgage broker / subprime / Wall Street CDO housing bubble.

Andrew Smithers takes this much further. He asserts that the incentives which fuel Corporate Equity Withdrawal not only caused the financial crisis and Great Recession of 2008 (all major recessions are started by falls in asset prices, he argues), but also stand in the way of recovery. Here's a set of rhetorical questions to summarize his argument:

1. Is everyone surprised at how profitable UK and US corporates are at the moment?
2. Is everyone surprised at how low corporate investment is right now in the US and the UK?
3. Is everyone, including the BoE and the Fed, surprised at how quickly unemployment numbers are improving in the US and the UK? Is everyone dismayed about how little these fresh new jobs are paying?
4. Was 2013 the new record year for corporate issuance following another record year in 2012?
5. Is inequality of income the topic on everyone's lips today?

Additionally (and this has less to do with the Macro picture, but it corroborates the whole argument) has anybody noticed that corporate earnings are massively more volatile than both their past volatility and their volatility in GDP accounts?

What if there is a single process/mechanism that powers all of the above? What if CEOs across the UK and the US were currently:

1. Refusing to lower their profit margins in the interest of temporarily sending up the stock price (and losing market share in the long run)
2. Refusing to invest in plant and equipment and R&D in the interest of temporarily sending up the stock price (and staying behind in developments in the long run) via higher short-term earnings?
3. Making up for the lack of investment by hiring cheap labor to fill in the gaps?
4. Issuing tons of debt, only to turn around and use the proceeds to buy back stock?
5. Taking huge writedowns as soon as they land a new job (like loan-book writedowns after the financial crisis, legal provisions after oil spills etc.) which they claw back slowly and goose up earnings with during their tenure at the top?
6. Compensating themselves with options that automatically get driven up in price as record amounts of stock buybacks are squeezing up earnings per share via the denominator and have taken the ratio of pay from the shop floor to management higher than 500:1?

Smithers basically addresses the major conundrum of the anaemic post-2008 recovery through a single explanation: CEOs across the UK and the US are only keeping their jobs for five years (rather than ten or fifteen like they used to) so they're doing whatever they can to drive up the share prices that turbo boost the value of the options they are awarding themselves. They are refusing to sacrifice profit margins to gain market share, they are refusing to make investments that won't bear fruit immediately, they make up for inadequate deployed capital by hiring cheap stop-gap labor, they are issuing as many bonds as the market can bear, landing tons of cash on their balance sheet, which then gets used to fuel massive stock buybacks, with the express purpose of sending up their pay pacakges.

As a result, expansionary monetary and fiscal policy has very little effect. Lower rates don't help with investment, because high rates never were the cause of inadequate corporate investment. Au contraire, low rates make it even cheaper to issue tons of bonds and buy more stock with the proceeds. And government spending is merely making up for the deficit in corporate spending, but at the cost of a continuously mounting government debt, which will at some stage become a source of instability.

I buy it!

This cannot be the only explanation, but it is very significant, because corporate profits are largely concentrated in the S&P 500-sized companies, not in the struggling Small and Medium Enterprises.

While he's at it, Smithers also demolishes two other explanations for the current slump in the UK and the US:

1. Balance sheet recession: Yes, it's what might have happened in Japan (about which more later), but not here, because firms in the UK and the US are not at all shy about borrowing at the moment and neither are households. Corporates are borrowing at record levels, while households' indebtedness has only come down by the amount of housing loan defaults. Everybody else is still borrowing all they can. Nobody feels chastened by the lessons of 2008.

2. Uncertainty: Corporates are refusing to invest not because they don't know what to do with the extra capacity, but because (i) it is more important for them to be able to keep prices and margins higher and (ii) they'd rather use any extra money to buy back more stock. Uncertainty is actually a good thing for corporate CEOs, it increases the volatility of the stock market and the value of their options...

A rival theory Andrew Smithers actually endorses is that since the crisis (which took out scores of competitors across many industries) the corporate landscape has become a lot less competitive. On the scale from perfect competition to oligopolistic competition all the way to monopoly, we have moved further away from competition and closer to monopoly. Monopolies, as we know, keep output below the competitive equilibrium output, prices above those at the competitive equilibrium, profit margins higher than their zero value under perfect competition and can act as monopsonists vis a vis their employees.

I actually like that theory even more. But I recognize it does not explain the current proliferation of crappy low-paying jobs (the cause of the celebrated "fall in productivity") as well as Smithers' theory.

In practice, both must be happening at the same time!

Having spent a hundred-odd pages on this main idea, the book drifts into stuff that did not captivate me as much.
There's a chapter on Japan which explains (convincingly to somebody like me) that the problem there is the opposite: too much corporate investment caused by overly generous depreciation allowances actually masks solid corporate profitability.

There's a chapter on Inflation that left me wondering if the author was scared of high or low inflation. You surely cannot reasonably fear both equally at the same time.

There's a chapter on the instability caused by the combination of very high government debt, over-inflated asset prices in US Equities, UK real estate and bonds all over the world, central banks that refuse to remove the punchbowl etc. but Stephen Roach could have written it (better) in 2004.

There's a singularly confused chapter on how Germany needs to spend more, but the only way to get them to do so is via trashing the JPY, the GBP and I think even the USD, such that German products will become expensive and the Germans will export less/ import more. Maybe it said something different, but it could have been written by Martin Wolf in the FT. He did write the forward to this book, after all. (I say that as a negative, I still don't understand how he's allowed to get the very same article through the editor of the FT every month without anybody saying "enough")

And then come the conclusions, which actually enraged me. It strikes me that if the problem is CEO shortsightedness, then those companies that have myopic CEOs, no matter how important, will be outcompeted by companies that don't treat their stakeholders like idiots. It will take no more than a business cycle. If Andrew Smithers is right about what's stopping the recovery from coming, then this slump will have the same ending as H.G. Wells' "War of the Worlds:" it will die of natural causes.

So I thought that the consistent reaction to the conclusions of the book is to be extremely hopeful. The author clearly does not see it that way and proposes a series of different ways to compensate management. But that's his prerogative, I'm just thankful he wrote this book. Oh, and I really hope nobody tries to do what he suggests, btw. The guy who has a written contract to work toward will always win, let's face it.

And just in case the monopoly explanation is important too, maybe somebody out there should wake up and start enforcing the Sherman Act!

Finally, in case Stockman is right, why not get rid of the corporate income tax and replace it with a tax on all distributions, and set it to the highest marginal income tax rate? But that's an altogether different kettle of fish.

Buy and read "The Road to Recovery" it is a unique book. I took away a message of hope. If he's right about the causes of the persistent slump, it can't be too long till things start going better.


The Story of English in 100 Words
The Story of English in 100 Words
by David Crystal
Edition: Paperback
Price: 6.79

5.0 out of 5 stars A celebration of the English language by an infectious fanatic, 24 Mar 2014
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I just LOVED reading this book.

A few years ago I read Mother Tongue by Bill Bryson and I enjoyed it thoroughly. But I bet that this tiny little tome will have a longer-lasting effect on my appreciation of the English language.

Not only is the author the consummate master of his topic, he's also head over heels in love with it. No exaggeration, you get the feeling he narrowed it down to 100 from his favorite 10,000 words. He weaves in the Celtic, the Anglo-Saxon, the Viking, the Latin and the Norman / French, but does not forget the American, the Indian or even the Pidgin and he goes looking for the medical and the Internet terms that have crept into the language too. As a Greek, and one who speaks five languages, I'm rather miffed he never refers to the Greek roots of several English words, but I regardless thought this was a masterpiece.

What we have here is a celebration of the English Language, rather than a mere story, basically. Reading this book is a bit like having the curator of the British Museum take you through his favorite ten exhibits. You get the history, the context, the evolution, everything.

I'm jealous of David Crystal. He gets paid to share his life's biggest passion.

Six stars


Conscious Capitalism
Conscious Capitalism
by John Mackey
Edition: Paperback
Price: 10.79

1 of 1 people found the following review helpful
3.0 out of 5 stars A preachy book about management, not capitalism, 10 Mar 2014
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This review is from: Conscious Capitalism (Paperback)
I'm frustrated by what's been happening with capitalism. I'm old enough to remember the times when some of us had to defend capitalism against what many believed to be sensible alternatives and it makes me sick to the stomach to watch a cabal of no more than ten thousand big money investors and their CEO puppets do some truly nasty things in the name of capitalism.

Other than call today's state of capitalism by its name (crony capitalism) this book does not address any of the issues I have with the system. It does even try to discuss why businesses today have stopped reinvesting their profits, why business today carries so much debt, why business these days spends record high amounts on lobbying and record-low amounts on pay.

Conscious Capitalism is, instead, a manual on how to manage retail businesses.

The most important point the authors make is that first you need to honestly and wholeheartedly embrace a purpose, a set of core values, and then the rest will flow, profitability included.

The second most important point the authors make is that you should look after all stakeholders of a business: clients, suppliers, employees, communities, the environment, even the competition, activists and unions, and then the shareholders will reap their dues, because taking care of all stakeholders will result in the excellence that will be essential for profits.

The third and fourth big points I could not tell apart, they concern "conscious" management, leadership and culture. That's where the going got a bit heavy with me. Like, a good manager should meditate, allegedly. I suppose if he's got the spare time it's a free country go ahead and meditate, but I would not list it in my top ten thousand priorities when I used to run my company. Hell, I skipped going to the dentist, I seem to remember.

Here's my big problem with the book: it sets out to refute some paper that was apparently written by Milton Friedman which said a business answers to its shareholders and nobody else. The authors say "no, it should do all these other things first and what's good for the shareholder will follow." Perhaps. But I was not convinced. I was never sold on why Milton Friedman is wrong (practically or morally) and I was never sold on why a cigarette company, for example, will deliver better results to its shareholders if it goes all moral on us, when its very purpose is not what I would consider moral.

On the other hand, the book did actually convince me that a company that buys from many suppliers and sells to the wider public can benefit from being all crunchy like the authors of the book seem to be. So if you're in that type business, do read the book, you'll get some good pointers.

And be prepared to deal with long strings of adjectives. Under this scheme, lives become" long, healthy, vibrant, productive and meaningful," for example. The scheme itself entails "living a life of meaning and purpose, service to others, striving for excellence, growing as an individual, friendship, partnering, love, and generosity." Hope you get the idea.

Oh, and prepare to LOVE Whole Foods, the Container Store, Medtronic and a few more companies that the authors like, while other companies you might actually have heard of (I'm thinking Google and Amazon, for example) only get brought into the discussion when it suits.

That said, if you have a good stomach for this type of hype, this is not a bad book about how to win in retailing. It's probably a very good book on that narrow topic. And it's got nothing to do with reforming capitalism, I'm afraid. That entails change to tax laws, regulations, property rights, intellectual property rights in particular, immigration laws, world trade agreements, foreign policy etc. Meditation? Not so sure.

And one last thought: a bit like I left that Howard Stern movie some fifteen years ago thinking he made a movie to apologize to his wife, or at least defend his actions to her, the thought crossed my mind many times that the Whole Foods CEO co-wrote this book with one of his gurus to feel better about having anonymously blogged about his competitors. I'm probably wrong about this. But I could not kick the feeling, it did color my reading of the book.


Anarchy, State and Utopia
Anarchy, State and Utopia
by Robert Nozick
Edition: Paperback
Price: 16.38

2 of 2 people found the following review helpful
4.0 out of 5 stars Wordy, but worthy, 11 Feb 2014
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This is NOT light reading. Then again, it's a philosophy book, and nobody obliged me to read it. I kept reminding myself of this every time I had to re-read a paragraph for the third time before giving up on understanding it.

So there you have it, I fully admit that whole sections of this book went over my head. But I'm glad I read it. Well, I'm not glad I read Chapter 1, which is entitled "Why State-of-Nature Theory?" I would have understood exactly as much of it if it had been written in Sanskrit. And very often this reads like the rantings of a madman. But a fun madman. A humble, honest madman with some amazing moments of clarity.

Executive summary:

1. Nozick sketches how a protection agency that guarantees its members' safety and/or property within a particular locale, while striving to compensate non-members for potential transgressions by its members, not only is morally justifiable, but also isn't a million miles away from what we call a state. So if you are some type of anarchist who does not like it, you don't have to join (and you and your fellow anarchists obviously can't expect it to look after you) but if you're just some guy who does not have hangups like that and there's a choice of protection agencies you will naturally go for the one that's most effective in the area where you live. So it's a bit of a natural monopoly locally and it's not something too distasteful. And it's a de facto minimal state. So a multitude of such contiguous minimal states can arise without violating anybody's natural rights. Takes him more than 100 pages to prove the statements I'm repeating (potentially mangling) here, but that's the gist of it.

2. There's a couple ways to decide if property is justly distributed: the "historical" and the "patterned." Historical breaks down as follows: justice in acquisition of said property and justice in its transfer. E basta. Patterned comes in as many flavors as you like. Egalitarian is an example of a pattern. Everybody gets the same. Another famous one that Nozick spends some 100 pages refuting is "Rawlsian," namely a distribution that leaves everything alone, except that the guys at the bottom get given a leg up. Nozick goes to town on this one, attacking the concept of the "veil of ignorance" which allegedly generates the Rawlsian distribution. Under this thought experiment, you don't know upfront if you'll be the guy who gets given the good deal or the crappy deal, so you take it easy on the guys at the bottom of the distribution. Nozick argues (convincingly AFAIC) that you can't judge from behind the veil. You'll always look at it from the angle from which you reckon you'll be placed in. Deeply philosophical stuff comes in, such as what your allocation really is. Are your brains part of your allocation? If you're a smart guy how can you think for the stupid guy? That type of deal. I was sold. But the best argument against "patterned" allocations Nozick makes is a lot better than that. Suppose we run the math, we maximise "utility" or "happiness" or whatever, according to our favorite pattern. And then suppose a couple fellows do a deal between them that they both feel is a good deal. Who are we to stop them? It can only be stuff like envy and jealousy driving us, since our allocations are unaffected. In summary, we cannot improve on the "historical" allocation, at least not from the perspective of justice. Much as we can look at the "historical" allocation and say it stinks, it's the one way of doing things that does not contain philosophical inconsistencies.

3. What does the perfect world look like, if there is no "pattern" toward which we need to strive? His answer is a bit of a cop-out. It depends on who you are, Nozick says. "Wittgenstein, Elizabeth Taylor, Bertrand Russel, Thomas Merton, Yogi Berra, Allen Ginsburg, Harry Wolfson, Thoreau, Casey Stengel, The Lubavitcher Rebbe, Picasso, Moses, Einstein, Hugh Heffner, Socrates, Henry Ford, Lenny Bruce, Baba Ram Dass, Gandhi, Sir Edmund Hillary, Raymond Lubitz, Budda, Frank Sinatra, Columbus, Freud, Norman Mailer, Ayn Rand, Baron Rothschild, Ted Williams, Thomas Edison, Bobby Fischer, Emma Goldman, Peter Kropotkin, you and your parents" might be your idea of the best crowd to hang out with, but they all may have different ideas of who they want to spend time with, what the social contract should be, whether private or public concerns are more important, if art matters, how to raise children etc. etc. So let a thousand flowers bloom, basically.

So here's why I'm glad I read the book. Most importantly, now I know what it does not say. Nozick claims, for example, that he set out to disprove point #1 and that he surprised himself when he couldn't. He does not claim anywhere in the book that things take care of themselves and reach a natural order, he does not say that some type of natural law will impose itself. He just says that the emergence of a minimal state does not violate anybody's rights. Also, while he states in the second part of the book that tax is theft, it's not some type of central tenet of the book. It's something that follows very naturally from proving that there is no such thing as a universally acceptable "pattern" for distribution. But he's almost unhappy that this flows from his arguments. You get the feeling that he wants to come back and look at this. I did, at any rate.

Also, the book is full of little gems. Like a footnote on page 239 that lists eight feelings about property, including the following:
ENVY is to prefer that your neighbor don't have something good if you can't have it
JEALOUSY is to want something you're normally indifferent to if your neighbor has it
GRUDGE is to prefer your neighbor does not have something good you happen to have
SPITE is to be prepared to miss out on something good if this means your neighbor misses out on it as well

Would not want to make it sound like I found this to be a masterpiece. The author claims in the closing pages that he had a pattern in mind all along, but the book is more of a mind-dump than anything else. And very few of the "proofs" offered are airtight and conclusive. It's for the most part proof by enumeration of cases. Except the author himself freely admits that his lists of special cases are almost never exhaustive. And at least half of them are there not to illustrate, but mainly to entertain. To entertain Robert Nozick first, and you the reader if you have the intelligence / patience / spare time to stay with him and have a chuckle. The book could have been a lot more parsimonious in the enumeration of special cases, counterfactuals, thought experiments etc. without losing any of its power. A lot of the time, reading "Anarchy, State and Utopia" feels like needing to hang up on a call from a lonely old relative, but not having the heart to do so.

So this book does not flow in a straight line. Euclid it ain't. It's more like the four color theorem, with half the proofs missing and the professor coming to class reeking of marijuana. I'm nevertheless glad I read it. It was instructive, it was at times entertaining and it made me think.


The Last Vote: The Threats to Western Democracy
The Last Vote: The Threats to Western Democracy
by Philip Coggan
Edition: Hardcover
Price: 13.40

3 of 4 people found the following review helpful
3.0 out of 5 stars 200 pages short, 17 Jan 2014
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I've followed Philip Coggan for at least fifteen years. Probably more. He is very clearly a genius. As far as I know, only two people in history have been able to produce a masterpiece every week, 52 weeks a year. One's Johann Sebastian Bach. Readers of "The Short View" know that the other one is Philip Coggan. For a long time I kept an article of his under my pillow, like Alexander kept the Iliad.

But this book's a dud.

Don't get me wrong, Philip Coggan's genius has not gone AWOL. It's fully on display. Page 87, for example, has a one-line description of the Great Depression: "..in 1929 ... an American economic slowdown caused the supply of credit to Germany to slow up. Banks collapsed, along with consumer and business confidence.." For those of us not paying attention he follows up with "The ensuing Great Depression was a huge challenge, both to governments of the day and to prevailing economic theory. Industrial production fell 25% in Britain and France and more than 40% in the US and Germany. Unemployment rose to 25% in the US and more than 50% elsewhere."

So the man is brilliant. But when I read a book I expect three things. I want to learn. I want to be challenged. And I hope to be entertained. "The Last Vote" fails on all three fronts. I read the whole thing and I can say I have learned absolutely nothing. And (with one exception I promise I'll get to) I have found nary a sentence, word or exclamation mark to disagree with. So I was not entertained, then, either.

Only two conclusions can follow from the above observation. Either Philip Coggan and myself find ourselves at a nirvana from where we can clearly see all the answers, or this book fails to ask enough questions. I'm afraid it's the latter.

What we have here is one of those big maps with a dot that says "you are here" preceded by some 200 (out of 266) pages on "how you got here." If you have a friend who has been in a coma for a long time and has never read Samuel Huntington (or similar) I can thoroughly recommend "The Last Vote" as a way for your friend to catch up with the evolution of American and European democracy, the coming demise of the European Project etc. Example: the US Constitution was written by landed white men whose main beef was they did not want to pay UK tax (and still very much reflects their values). Example two: people get the vote after risking all in a war or alternatively after keeping the economy going while their husbands and brothers are risking all in a war. Switzerland (no wars) did not give women the vote till the seventies. Example three: European elites made a mockery of democracy when they forced the Danish and the Irish to keep running referendums until they elicited the "right" answer. Example four: in both Greece and Italy elected politicians ceded day-to-day management (the position of prime minster!) to unelected bankers rather than enact unpopular measures themselves.

But for those of us who have read all of "The Short View" and have kept up with world affairs, have noticed the world is moving away from one-man-one vote toward one-dollar-one-vote and have heard of Marine LePen and Golden Dawn this cannot be one of the 500 books we're going to read in our lifetime. 65 pages of not very deeply probing forward looking ideas on an unfocused range of topics did not warrant the time invested.

Last I'll leave my views about the one and only sort of "big idea" in this book. Coggan laments that our elected politicians often defer to bureaucrats when it comes to policy, effectively making you and me twice removed from the decisions we'd like to vote on, which makes us voters even more annoyed and even less likely to participate in the democratic process. I'm from Greece, so I'm familiar with the alternative. After every election EVERYBODY gets replaced everywhere. The CEOs of theoretically private, exchange-listed banks change on a four-year cycle, for example, as does the management of the theoretically private, exchange-listed power corporation etc. To say nothing of the directors of all ministries, quangos and many non-directors too. I'm not sure it's better than having the same, less accountable professionals throughout. I was brought up to believe it was worse.

Enough complaining about what is fundamentally a good book. I can't get myself to give it any fewer than three stars, because I happen to agree with pretty much everything it says and because Coggan lays it out so clearly. I just wish I'd read something else.

I remain a fan. But from now on I'll just read what he has to say about finance.

Tell you what. If he adds 200 pages to this book that look forward rather than back, I might consider breaking that rule. But not before.


The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron
The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron
by Peter Elkind
Edition: Paperback
Price: 6.99

4.0 out of 5 stars Drinking from a hose, 7 Jan 2014
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This book is generally acknowledged to be the definitive account on Enron and the creative accounting era. And it is a truly overwhelming piece of research.

In contrast with "Barbarians", "When Genius Failed" or the more recent "Billionaire's Apprentice", it does not read like a narrative, and that's because it really can't. Enron was a lot more complex than a single transaction or a single hedge fund. It was an agglomeration of businesses, each with its own specific character. You can't go over the whole thing linearly.

It starts like a narrative. The authors start by painting a portrait of the main characters of the book, namely Lay and Skilling, weaving their bios and their credos well into the tale of the genesis of Enron through the merger of a couple gas businesses and the adoption of mark-to-market accounting for long-term projects and markets. But then the authors have to branch out.

They do a very commendable job of describing how Enron developed its sundry lines of business, from trading gas, to trading power, to financing power plants across the planet. This comes complete with deep profiles of the Enron managers in charge of these businesses.

Finally, the book homes in on the last three to four years of Enron when an obsessive focus on the share price, combined with a brash get-rich-quick attitude amongst the narrow leadership of Enron (but not necessarily the rank and file) led the company to a series of insane business decisions (like the creation of two enormous new divisions out of nothing) as well as to aggressive and eventually fraudulent business practices. Again, you get complete portraits of Andrew Fastow, who did most of the accounting magic, and his team.

The book is a tremendous source of information. God knows how much digging and how many interviews were distilled into these 400 pages. That said, this is an unfinished book. You find out who did what and when. But the book leaves as many questions open as it provides answers to. Most importantly, you don't get a good idea of whether Enron ca. 1997, before the crazy accounting practices and business schemes became the norm, was a valid business or not.

The authors are incredibly good at digging, less good at interpreting. I personally never figured out if this was Murder on the Orient Express, where everybody shared a bit in the crime, or a single perpetrator or even death from (expedited) natural causes. Was it the arrogance? Was it the pay structure? Was it the massive leverage? Was is the accounting practices? Was it the nature of the business? Which business? Would a sounder company have withstood the revelation of the fraud? Finally, no sense is given for how Enron ranked vis a vis its corporate peers in terms of playing fast and loose with its accounting and if they also shared similar compensation structures, corporate structures etc.

Regardless, there's a lot of food for thought here. And I guess if you want a tight narrative, there's always the movie!


Power And Prosperity: Outgrowing Communi: Outgrowing Communist and Capitalist Dictatorships
Power And Prosperity: Outgrowing Communi: Outgrowing Communist and Capitalist Dictatorships
by Olson
Edition: Paperback
Price: 12.99

5.0 out of 5 stars Distilled brilliance, 24 Dec 2013
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A bit like Thinking Fast and Slow, but with a lot less rambling and almost zero cross referencing in the main text, this is a book that's meant to summarise a career's findings. It's written by somebody who both knows a whole lot and wants to tell you everything he knows. And it's written so beautifully, you keep asking yourself "why did I not think of that?" To which the answer, of course, is "because it's only so clear once somebody has told you."

Mancur Olson, the man who explained in his youth one of the main problems of our otherwise quite solid market economy, the tendency of concentrated interests (such as lobbies, oligopolies and unions) to prevail over the interest of the silent majority, spent the last couple years of his life writing this primer that sheds light on some of the big questions in politics. Here's a list of my favorite examples:

1. How come most countries on earth used to be run by a dictator / tyrant / king? Answer: because it beats the hell out of what was the alternative at the time, namely being raided by itinerant hordes. Not unlike a mafia don, a "Stationary Bandit" had every interest in seeing his people prosper and every interest in providing them protection from roving bandits. So that's the system that prevailed everywhere for a long, long time.

2. What does it take to get rid of the dictator / tyrant / king once you're fed up with him? Answer: first, a big event that upsets the applecart, such as a famine or a plague or a discovery; second, a multitude of interests on the ground so no single successor scheme take over where the previous tyrant left off and third, no external threats. Daron Acemoglu goes a lot deeper in trying to explain this in his book from 12 years later, but still, what a beautiful summary!

3. How come oligopolies and concentrated interests can form and thrive when we know that even two people can sometimes not agree to collude? Ah, that would be because the prisoner's dilemma never occurs in nature. Most economic agents who matter can talk and compare notes. And they are not prisoners. Hell, even prisoners can get it done if the game is repeated.

4. If one day we achieve perfect information and zero transaction costs, will the diffuse interests of the consumers, the poor or the unemployed finally prevail over concentrated interests? Erm, probably not. And that's because the basic problem will not disappear. The marginal member of these groups will still do best if somebody else does the hard work for him. The incentive to free-ride will remain.

Then he moves to the meat of his book, namely the dissection of why the fall of the Soviet Union did not lead to prosperity. It's still a step by step series of answers to questions. Stuff like

5. How come Sergei Bubka broke the world record for pole vaulting 17 times, nine of those by just one centimetre? Ah, because under Stalinism the able and the unable got paid the same up to the fortieth hour of work, but after that they got something a lot closer to market rate. So the able, those who could do superior work, would not only (a) get underpaid for their first forty hours of work, thereby giving the state their labor for super cheap, but also (b) they would work as much as possible past that fortieth hour, since that's the bit of their labor that got compensated well. Also, they could be guaranteed to gravitate toward the jobs that required skills. My choice of example, of course, was meant to prove that you could go around the system. Bubka could probably have set the bar fifteen centimeters higher twice, rather than a couple centimeters seventeen times, but that would have landed him two bonus apartments, rather than seventeen.

6. What are the main ways to collude against the hyper-extractive Stalinist regime? Two mainly: first you can work together with the guy right above you and the guy right below you in the chain of production to sell privately excess resources that have been allocated to your endeavor; second, you can work together with state-run near-competitors to trade with one another excess resources, rather than ask for them from above.

7. What's the one biggest difference between Germany post WWII and Russia post Communism? In Russia the main source of corruption, the informal markets that dealt in the re-allocation of misallocated resources, not only survived the transformation intact, but by definition reached into everywhere. By dint of having set prices and quantities, indeed by having set them wrong, the system had not only given birth to a parallel, informal market system for the reallocation of resources, but had actually forced every single citizen to deal with this system (or alternatively perish). The people in charge of these informal networks continued to thrive after the transition, except they no longer had anybody to fear whatsoever. They could carry on their previous trade legitimately. Only they knew how the system worked.

8. What's the difference between Russia and China post Stalin/Mao? Mao had purged all Communist party insiders during the infamous Cultural Revolution. When Deng took over, there was no entrenched bureaucracy of party cadres who could resist him. The market reforms imposed by Deng were only resisted by elements in the very top echelons, but the rank and file knew not to stand in the way.

Finally, Mancur Olson presents us with the big idea of his book. Again, it's a question: How come market system fails in some places? How come the logic of the market does not prevail everywhere? When we visit third world countries it is quasi impossible not to bump in to a suk or an open market. If indeed nothing can go wrong in a society that encourages mutually beneficial trading, how come only some countries allow millions of mutually beneficial trades to turn into one big vibrant market-clearing machine?

The answer is that there are two types of markets: spontaneous markets and socially contrived markets.

Spontaneous markets are the ones that will appear regardless. The author goes as far as to say that spontaneous markets are irrepressible. Essentials will find their way to people regardless of how bad the government is, regardless of how extractive a despot is, regardless of how poorly the price has been set. When no capital investment is necessary for the production of a good, for example, it will be traded as many times as necessary, formally or informally, until it reaches whoever needs it most. Only two conditions need to be met: first, both parties must stand to gain from the trade and second, both parties must be able to somehow enforce contracts, a la limite by threatening to refrain from repeated trades. So that's how come markets are ubiquitous.

Socially contrived markets, on the other hand, are the markets that need the support of the state to exist. If it is essential to invest in capital (such as plant and equipment) or human capital or intellectual property to provide a particular good or service, then it is equally essential that a government exist to guarantee those property rights. And it is in the provision of the property rights which support socially contrived markets that Mancur Olson identifies the difference between rich countries and poor countries.

Pretty simple once somebody has pointed it out, no?

I really really enjoyed this book.
Comment Comments (5) | Permalink | Most recent comment: Jan 10, 2014 9:10 PM GMT


The Billionaire's Apprentice: The Rise of The Indian-American Elite and The Fall of The Galleon Hedge Fund
The Billionaire's Apprentice: The Rise of The Indian-American Elite and The Fall of The Galleon Hedge Fund
by Anita Raghavan
Edition: Hardcover
Price: 16.29

2 of 2 people found the following review helpful
4.0 out of 5 stars Almost as good as Barbarians, 11 Dec 2013
Verified Purchase(What is this?)
One of those books that will define a period.

"Barbarians" summed up the junk bond era (and remains my favorite business book ever), "When Genius Failed" summed up the bondarb era. A movie (Startup.com) actually summed up the Internet era. "The Smartest Guys in the Room" (which, shame on me, I've yet to read) summed up the creative accounting era.

While we're waiting for somebody more focused and less confused than David Stockman to pick up on his tremendous ideas and sum up the causes of the ongoing financial crisis, Anita Raghavan comes in and tells us the tale of how the US Government finally got its act together and started locking up the insiders who we've always suspected creamed all the profits out of the stock market, amassing fortunes that make Michael Milken look like the enthusiastic amateur he was when it came to insider dealing.

I have no doubt that one day we'll read about SAC Capital, but for now Steve Cohen is sitting on USD 8 billion p.a. and we really don't know how his story will end. Until he's had his day in court, if he ever does, indeed, we must presume him innocent; that's how we roll.

But there's no need to wait. I don't see anybody topping this breath-taking account . The Millionaire's Apprentice sets a very high bar. The author has conducted deep research into the characters and the events, and this shows. She sat in court, she listened to the tapes, she listened to all views and I'd be extremely surprised if one fact in the entire book is wrong. When there's doubt, besides, the author presents both sides, never shying away from saying how she thinks it went.

More than that, this would be a fantastic book even if it was fiction. You get character development here. There's a plot that moves quickly. There are tons of threads that get woven together. The author has evidently left loads of stuff out (duh!), but there's just enough there to make you know there's more. This is a very fine line to walk. Any more and you'd really lose count of the names and roles and angles. Any less and you'd feel short changed. So very often I'd find myself thinking "who's this Goel guy again?" and then immediately "oh yeah, he's the guy at Intel," for example. The key point is she never lost me, this really read like a novel.

Except of course it's very much a piece of journalism. An exquisite piece of journalism, at that.

"So where's the fifth star, Athan, boy?"

Ah, yes. I don't buy at all that this book tells the story of the Indian diaspora. The author thinks she's doing two things here. First, telling us a story about insider dealing and second telling us about the "twice blessed" generation of Indian Americans. If I was one of them, I'd be furious. In my view she holds her own people to a crazily high standard here and kind of acts like an uninvited judge and jury on millions of her own.

What do I care? I'm from Greece, not India.

Well, this book purports to tell us about two things, including on its cover. The fact that it does such an incomplete job of one of the two tasks the author assigned to herself has to be a failure.

More to the point, I think the author fails in another respect. By being "plus royaliste que le roi" when it comes to judging one of her own, I think she misses out on something rather big: Rajat Gupta probably acted 100% in line with other people in his position. Yes, maybe he did not notice that the wind had started blowing from a different direction. But if you ask me, by dint of being on the wrong side of the first ever incidence of wiretapping, the poor fellow just got very unlucky. Period. He ain't a stain on all Indian Americans.

Finally, a point of order. The basic thing in a Greek tragedy is at some juncture you get presented with a choice. A choice where you're damned if you do and damned if you don't. This is the "tragic" choice. You make that choice and a bunch of inevitable consequences follow and you face them with dignity or with no dignity, everybody dies in the last scene and then we all go home.

These fellows never crossed any type of Rubicon the way I see it. They got to where they got by sailing at the appropriate-for-the-time angle toward the wind, but failed to notice when the weather changed. The world changed, not them. And amen to that, of course.

But I digress. Buy the book.


The School Revolution: A New Answer for Our Broken Education System
The School Revolution: A New Answer for Our Broken Education System
by Ron Paul
Edition: Hardcover
Price: 17.99

0 of 1 people found the following review helpful
1.0 out of 5 stars I've paid GBP 14.99 to read an advertisement, 27 Nov 2013
Verified Purchase(What is this?)
I almost never award one star to books, but I'm rather angry with "The School Revolution"

I bought the book for legitimate reasons:

1. I have a generally positive impression of Ron Paul as somebody who speaks truth to power
2. All I learned in school was how to quietly (or otherwise) count down 40 minutes
3. My son just started school and I'm giving some serious thought to the idea of home schooling
4. I would not know where to start

I just finished this 205 page book (small pages, wide margins, probably a 150 page book in any other format) and I am none the wiser. This is only tangentially a book about home schooling. It is an advertisement for Ron Paul's forthcoming home schooling curriculum.

I've paid GBP 14.99 to read an advertisement.

The advertising copy reads as follows:

* State school does the bidding of government because government bears the costs and "he who pays the piper calls the tune"
* State school teaches our children to depend on government for help. It does not teach freedom and leadership
* State school addresses the needs of the worst student, it is lowest-common-denominator schooling
* Lecture hall / classroom teaching, which entails students furiously copying from the board, was fine for year 1450, but is now obsolete
* These days, technology allows you to play back taped lectures
* More to the point, technology brings better teaching tools to bear than lectures
* Just as importantly, the Internet has brought down the cost of home schooling to virtually nil
* Relative price adjustments are a powerful agent for change. The Post Office is now visibly doomed. State school will follow
* Even including the opportunity cost of one parent giving up his/her job, all-in it isn't that costly to home school
* ...especially if pupils accumulate through home schooling credits that count toward college.
* Parents should steer clear of schools that lavish attention on their children because this stifles independence
* A coddled student will find himself/herself lost in college. A good home schooling curriculum will emphasize self-learning
* My curriculum will teach your kid how to become a leader and how to think freely
* My curriculum will be complete by year 2015
* Spread the word! Lend this book to a friend, but only for one week. Then lend it to somebody else.

So there's a bunch of ideas here. Some seem exactly right, some I disagree with, while some are conspicuous through their absence.

For example, I cannot agree enough with what Ron Paul has to say about lectures. They are a tragic waste of time. And it is no secret that school was instituted in the UK during the industrial revolution with the express purpose of making it possible for both parents to work a full day. Conversely, there's a bunch of things home schooling will never do. For example, if it wasn't for state school, where exactly would the children of immigrants learn proper English in a country like America that calls itself a melting pot? And the silence of this book on math and science (where in my view our schools fail the most criminally by the standard of this information age) is deafening.

But all of this is beside the point.

My main point is that this book is an advertisement for a product that is not yet for sale. Suppose I pull my kids out of school, put them on Ron Paul's program and next thing you know he changes his mind. Or he gets run over by a bus. Where am I left?

Finish your curriculum, sir, then advertise.

And for goodness' sake, DON'T MAKE ME PAY FOR YOUR ADVERTISEMENT. If I'm going to pay 15 quid for a book, don't insult me, show me the bloody curriculum. An outline! Something! I am soooo angry. I genuinely want my money back.


Libertarianism: A Primer
Libertarianism: A Primer
by David Boaz
Edition: Paperback
Price: 12.76

3.0 out of 5 stars Prosaic, but honest, 22 Nov 2013
I was given this book by somebody who loved it and I promised to read it.

I must confess that I approached it with prejudice. I've never met a poor libertarian, my prejudice is that libertarianism is a philosophy of convenience for the rich. The way I see it, the minority of people who pay tax directly (we all do indirectly) need to feel good about something. And this is a philosophy that helps them stand for a set of ideas, rather than merely be indignant about being "soaked" on tax.

I was so prejudiced about the whole thing, I bought a book by a Nobel Prize winning economist / historian / philosopher about the role of institutions (for example: the government) and read it first. I thought it would educate my mind on the subtleties of the issues I'd confront in any book about libertarianism and give me a bank of ideas to compare with as I'm reading.

I needn't have. David Boaz' "primer" is not an ambitious book. It never goes deep enough into issues that you could vehemently oppose. Equally, it does not build its arguments on an axiomatic basis; so you can't go through and look for errors in logic that isn't there. This is a presentation of a bunch of ideas. "Primer" is probably overselling it, much as it says so on the cover.

I am not exposed to philosophy, so I hate taking literally what "popular philosophy" books have to say. The history of the various ideas will inevitably be interpreted from the angle of the author and important thinkers will invariably be mixed with less important thinkers who are closer to the ideas of the author. If this author did so, he certainly did it without me noticing. It was fun to read what he had to say.

That said, he completely failed to change my mind on any of my prejudices. How do I know? Easy: on the back of the book there is a questionnaire that helps you decide if you are a libertarian or not. I don't think I'd have answered any of the questions differently before and after having read the book, and I indeed remain of the opinion that this is a philosophy of convenience for taxpaying Americans.

Which brings me to the first major benefit I gleaned from reading this book. I finally understood why libertarianism is big in America and nonexistent everywhere else:

As the author argues, and from having lived there I'd have to agree, in America people who are free-thinking about the economy tend to be conservative about personal liberties. They call themselves the "conservatives." And people who are free-thinking about personal liberties tend to be anti-market when it comes to the economy. They are, of course, the "liberals." What here in Europe you'd call normal (even if we don't necessarily practice as we preach) is difficult to find in America as an ideology. But Americans call it libertarian. Over here there's no point giving it a name. We may not truly practice this combination of free markets and personal freedom around here, but we all advocate it.

It's actually easy to see why things are different in America, and this is me talking now, not the book: in America, personal liberties are de facto significantly more circumscribed and under attack. Much as Americans are free to carry guns (or perhaps because they do) your life can be under threat if you perform abortions, for example. Some states will lock you up forever after the third petty crime. The percent of Americans in jail is a vast multiple of what it is in any European nation. A cop catches you speeding around here in the UK, you actually don't have to show him your driver's license. You have 48 hours to present it to the cop shop of your choice. No American believes me when I say that, he's thankful if he does not get splayed on the hood of his car. This week, French cops are refusing to police riots in Brittany because they're scared. Peaceful "occupy Wall St." protesters got pepper spray in their face. Better not to get into Wikileaks, drones etc. Meanwhile, the US government taxes much less than any European government (at 25% of GDP between state and federal, significantly less than half of French or Italian tax, for example, and two thirds as much as British or German) so the economy is vastly "to the right" of Europe, with many "natural monopolies" fully privatised. The most celebrated Democrat president of the last 50 years got rid of the Glass Steagall act, allowed pharmaceutical companies to advertise drugs on TV and on his last day in office pardoned the country's most famous tax dodger. So there is a distinct "losing side" in America: the "liberals." It's game set and match, really.

As a result, the axis along which the friction occurs is between the losing "liberals" and the winning free-market / lower personal liberties "conservatives."

The a la carte fellows who don't want either package and want low government involvement in the economy and more personal freedoms have a name in America, they call themselves the "libertarians." They tend to be rich, because the poor are too busy, of course. That's the first thing I learned from this book and it makes good sense, much as it is very obviously a sweeping generalisation. But it explains a lot.

The other idea I found appealing in this book is the idea of "natural rights." Yes, I'm revealing that I know diddlysquat about philosophy, but that probably makes me the target reader. As a young student I was told that the mathematics is out there and all we humans have to do is go discover the theorems. We're not making them, we merely go find them. So we now have proofs that you can pack spheres particularly well in 24 dimensions, that you can color a map with 4 colors, that there are 52 types of finite groups and no more. The book argues that we have natural rights and all we have to do is go find them. We set up courts and we grope toward the truth. Sounds awesome to me. Don't know if it's wrong or right, on the other hand. Maybe it's fanciful. David Boaz states it as an axiom, but God knows he needs to do better than that.

Similarly, the author argues that in a free economy every time I transact with you by definition we must both be winners, otherwise the transaction would not occur. So a market economy works via billions of such win-win transactions and gets us to a place where a planned economy could never go. Yes, agreed, but a second year course in Economics in every single university in the world has a few weeks dedicated to stuff that people cannot achieve in this manner. Dunno, air traffic control. The author is rather pathetic when he goes looking for examples that defy this theory. Yeah, congratulations, there's a country where people got together and built lighthouses, but it was the country that controlled the seven seas for a few centuries.

More to the point, yes, I see where the author is coming from. But he has not made me move from where I started. He states that restaurant owners should be allowed to admit smokers. I have not met anybody who is not extremely happy about the smoking ban. Maybe not at first, but pretty much everybody I know has turned on this issue. The state got involved and stopped people from harming themselves in public places. It was necessary for somebody to nudge us that way (and I'm sorry I'm borrowing the hyper-popular term) but now car companies don't fit an ashtray as standard anymore, and that's because this small nudge (there I go again) has moved us all to a better place.

I'm a mathematician, that's proof by counterexample. QED, baby.

Regardless, I enjoyed the book. It's far too prosaic for me to award it more than three stars, but it informed me, it entertained me and it made me think. Bring on Nozick! He won't be as easy to dismiss.


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