Money For Nothing:
Nicholas Brealey Publishing
Alistair Schofield, Managing Director, Extensor Limited
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(All sales commission goes to charity)
Roger Bootle is one of Britain’s better-known economists. He studied at Oxford University and then became a Lecturer in Economics at St Anne’s College, Oxford. He later became Chief Economist at HSBC and was at one time a member of Chancellor’s panel of Independent Economic Advisers, the so-called “Wise Men”.
He now runs the influential consultancy Capital Economics but is probably best known for his book The Death of Inflation. Published in 1996 it forecast an era of persistently low inflation and warned of the risks of deflation. The book was widely criticised at the time but has since proved itself to be somewhat prophetic.
In the first part of Money For Nothing, Bootle continues the theme of his previous book by looking at the risk of deflation in the UK, Europe and globally. He plots the historic circumstances that led to the depression of the 1930’s and more recently to the difficulties faced by the Japanese economy and draws some unnerving parallels with current circumstances. Bootle also draws parallels between the bursting of the Dot Com Bubble around the turn of the millennium, the Dutch “Tulipmania” of the 1630’s and the South Sea Bubble of 1720. Interestingly though, despite the collapse of world’s stock markets wiping $13 trillion off the value of all world share values (the equivalent of $2,000 for every man, woman and child on the planet!), our economy appears to be recovering relatively well.
However, Bootle warns that the end of the Dot Com Bubble has led people to invest more heavily in property causing surging property prices around the globe. It is this market that he fears will now begin to weaken with him predicting a 20% fall in residential property prices during the next 3 years.
The problem of boom and bust economics he attributes to people’s desire for “money for nothing”. We are all to quick to believe that there exist golden opportunities to achieve great riches relatively easily. How else can you explain the fantastic valuations that were being placed on dot com companies that were not making profits and had no assets to speak of? For example, when the assets of former dot com darling “Click Mango” were auctioned off, the most notable item for sale was their inflatable boardroom, a sort of adult bouncy castle in clear plastic and opaque pink.
If you have had your fingers burned during the so called “Dot Con Bubble”, then, as Bootle points out, you were in good company. Throughout history people such as Irving Fisher, Sir Isaac Newton, Lord Keynes, Winston Churchill and George Sorros also suffered serious losses in the pursuit of “money for nothing” investments.
But what of the future? In the second part of the book, Bootle considers the implications for the country in having moved towards a knowledge economy. Although many observers bemoan the loss of jobs in manufacturing, the fact remains that the overhang of surplus labour in China is so great that in the manufacturing sector, China’s prices are going to become global prices leaving western manufacturers in a position where they will be unable to compete.
Bootle argues that land and materials have been falling in terms of their economic importance in western economies while the role of knowledge has been growing significantly. For example, it is the role of knowledge that explains why the economy of Hong Kong can be almost as large as that of Russia.
The importance of knowledge to companies can be seen from the rising ratio of sales to physical assets. This is because knowledge“ possesses the magical quality of being able to produce money out of nothing.” Unlike land and materials knowledge has a peculiar quality, in that if someone acquires or possesses it, this in no way diminishes the quantity anyone else possesses. Once knowledge has been gained, which takes time and effort, it can be used over and over again at potentially no cost. For example, Microsoft has become one of the world’s largest companies by selling the same software package millions of times and CocaCola has made a fortune by selling a flavoured liquid.
Moreover, the growth of the Internet and computer technology means that knowledge acquired today is stored and disseminated to millions of people making the building of greater knowledge more rapid. To substantiate this point, Bootle points out that of all the scientists that have ever lived it is estimated that over 90% are still alive today.
In the final part of the book Bootle looks to the future and paints an extremely positive picture of the economic circumstances of humanity. However, he also points out that improved economic wellbeing will not necessarily result in increased happiness. He writes “… despite the enormous increase in wealth and the improvement in living standard, by and large people seem to be no happier than they were 50 years ago.” This, he concludes, is because satisfaction is measured relative to those who we regard as our peers and not in absolute terms. Not only is this something of a curse, it is also the source of our prosperity as we strive to achieve higher and higher standards of living.
However, despite the greater prosperity that Bootle forecasts, he does not believe that it will, as some commentators predict, translate into greater leisure time. While it is true that the average number of hours worked in Europe and North America fell from 3,000 hours to 1,600 hours between 1870 and 1990, more recent surveys in the United States reveal that in the 20 years to 1992 the working hours of the average employee in the US increased by the equivalent of one month per year.
It would seem therefore that despite higher standards of living, we will continue to have to work hard to stay happy.
Money For Nothing is a fascinating book that covers a vast range of subjects related to our economic circumstances and future. It covers relatively technical subjects in an easy-to-understand way and lightens them with Roger Bootle’s apparent sense of humour.It is a book I would strongly recommend to anyone interested in our recent economic past and in the decisions that will face our politicians and business leaders in the near future.
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