Monday, September 08, 2014

Wrinkles and Grey Hair Rock

I have read Steven Levitt of Freakonomics fame argue the case strongly for heavy borrowing and spending when you are young in an attempt to even out your consumption over your lifetime. This is contrary to regular arguments on 'the magic of compound interest' (which yields over 1,000,000 hits in a google search) which argues for aggressive saving early on and frugal living. Once compound interests kicks in, your money can do your saving for you. This is true, but it does take quite a long time for savings to catch up when compensation is 'Top Heavy'. In a Capitalist Economy, the majority of people are paid based on their Cog Value, i.e. how much it would cost to pay someone else to do the same job, and not a share of the value they added after costs. The advantage of this is that you have price discovery - you can look at surveys to see what others are being paid. The other advantage is that you feel like you get paid for your effort. A Capitalist Economy doesn't pay owners for effort, it pays for value added. I suspect the challenge for a real 'Revolutionary Labour Movement' would be in empowering workers (who want to) to have a sufficiently wide and flexible skill set to have the confidence to break away from the relative safety cog life provides.

Given that compensation is Top Heavy, I have been thinking more about the value of Levitt's argument and the 'Ladder Problem'. The Ladder Problem is that people tend to rise aggressively to their level of incompetence. You do a good job. You get promoted. You don't shift your skill set and move to the bottom of another ladder as that would mean moving down. We want to move up. So you move up, and do a good job. You get another promotion. Now your skill set starts being very specialised and valued. It becomes even harder to start at the bottom of another ladder. Eventually you get promoted to a level where you do a bad job. And the promotions stop. Now you are at your 'level of incompetence' but don't want to move down, or to the bottom of another ladder. The skills required by the Senior Executives are those of a generalist - someone who gets every ladder.

Like a Marathon runner who starts slowly, with something left for the end - perhaps a very long term mindset is required. What skills do you want when you are at your productive peak - I think that is probably age 40-70. That is when you have enough grey hair and wrinkles to have gravitas. You have likely been through a few bumps, so you aren't just an unempathetic superstar who thinks they see the matrix. By that stage you are also more likely to have built up a network that trusts you. Who knows, if we are going to live to 150, maybe your most productive years are 40-90?

If that is true, I suspect that Levitt may be right. Perhaps aggressive saving in the early years isn't the best approach. Borrowing to spend aggressively may not be wise if you get yourself into a debt spiral. I think the answer might be to spend more time in the early years focussed less on climbing the ladder and more on building the skills.  There is value in having a 'Margin of Safety' for rainy days, but maybe the aim should be for a buffer rather than thinking about a nest egg too early. Rather than aggressive saving, perhaps aggressive investing in skills?

Of course - some of those skills should just be learning to appreciate the 150 years (if we are lucky) that will go by in a blink. Building skills is fun... so

Exciting Times.

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