Price is not Value

If you earn lots of money, it is not proof you are adding lots of value. Price is not value. Salary is the price of your labour. Capital is the size of your ownership. Dividends are management’s impression of a sustainable payment stream from the business. Rent is for something you have. Nothing to do with your value add. Nothing to do with you. Price is simply a reflection of the balance between supply and demand. If you earn a lot, it means there is an undersupply of the thing you are selling. If you don’t earn much, it means there is an oversupply of what you are selling. Supply doesn’t adjust quickly because of barriers to entry, and barriers to exit. Time to build the Capital. Time to build the necessary skills and knowledge. Time and obstacles to create or overcome the barriers that form the container. Price is not Value. Price is not Value. Price is not Value. You are not your price.

Supply and Demand

Given Time

I am not that interested in the first five years, if that is all that is on offer. I believe in compounding and foundation building. If you are living hand-to-mouth, neither of those factors are relevant. If you are simply being paid for the work you do, and that gets consumed. Money is made in containers. If you help build a container, you want to have a stake in that container. Ownership. The kind that exists beyond you. Real wealth is created over the long term. Through owning the container. Through owning the barriers to entry. Even fifteen years is short. Compounding is just starting to kick in. We judge ourselves over short periods like months, quarters, and years. What is your 100-year plan? What is your 1,000-year plan? What is your plan that has nothing to do with you?

The Cango Caves

Holding the Knife

The market decides the price of pie. The one holding the knife decides the size of the slices. Price is not value. Not all good ideas are good business ideas. Value is deeply personal. To become a good business, something has to depersonalise and scale. To create a market, you need something strangers recognise and trust. Something that lots of people value, but that not lots of people provide. You need a product. You need the required capital. Then you need a container. A pie dish. The market will help find the price based on how many people want pie, and how many people sell pie. Based on what the alternative choices are to pie. Once sold, how the profit gets split depends on who holds the knife. There is no internal market. Only the ability for people to stay or go. The person with the knife has to (1) pay people enough to stay if they want them to, and (2) create an illusion of the pie pieces relating to their contribution. The person with a knife has to pretend in a way markets don’t have to. Markets simply reflect supply and demand.

All for Show

Your Head

I am a big believer in Institution Building. One of the reasons for the stretching of the pay scale from those on the bottom to the top is that human excellence gets institutionalised. Those at the bottom are paid their cog value (how much it would cost to replace them). Those at the top divide up what is created. I am a Yoga Teacher. In training, and under supervision, I was often reminded not to let students experience of Yoga go to my head. If they love the class, they may give me all the credit. It’s not me. It’s the Yoga. Yes, I played a role. The same is true in big institutions. Decision makers at the top will credit themselves with the full “marginal impact” of their actions. They will justify huge salaries as meritocracy. “What would have happened if I hadn’t done that?”. What they don’t do is say, “What would have happened if the Institution wasn’t behind me?”. We build on what came before. We build together. Every single individual is replaceable if you are thinking in transactional terms.

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.