A Salute to Dr Eugene Fama

Q) What’s the difference between the government shutdown in US and the government shut out in NZ?

A) The NZ civil servants laid off will not be re employed – until a change in government occurs – and certainly will not receive back pay.  

Washington created a 16 day shutdown – Wellington, 5 years.  The world held its breath as US politics played out.  Most of New Zealand is totally unaware of the affect upon Wellington – contractors, small business owners, service industries from the loss of 3,000 state servants.   

The irony for me is twofold.  Firstly – concerns around US ongoing financial viability (capitalism); secondly the award to three American economists of the 2013 Nobel prize for economics.  How can this be?  A nation steeped in national debt, printing money to pay its bills – receives international recognition for science in economics. (dictionary meaning for economics – the production, consumption and transfer of wealth).

Of course the answer lies in the system of production, consumption and the transfer of wealth – the system being capitalism (dictionary meaning for capitalism – a system in which a country’s trade and industry are controlled by private owners for profit).  Private ownership of trade and industry doesn’t guarantee profit or even a positive cash flow – especially when governments manipulate both fiscal and monetary supply and demand – whether Wellington or Washington.

However what capitalism continues to do better than any other economic system – is allow for recovery.  Business owners, given the opportunity to make a profit, own an asset (free from government – local or national imposition) will adapt, innovate and focus to profit fundamentals. Some profit – some fail. That’s the risk with ‘markets’ – that’s the risk and or opportunity that a capitalist system provides.

That’s happening in Wellington and it will continue to happen in all countries where capitalism prevails.  It just so happens that US has been the best at it for the last century – and people like Dr Eugene Fama, Professor Robert Shiller and Lars Peter Hansen have provided intellectual debate around finance and economics.

As we (NZ) improve the ‘debate’ so too will we improve overall financial literacy.  The Americans have won the Nobel prize 300 times compared to UK and Germany 100 each – not really a reflection on the size and profitability of the worlds capital markets (the value of company shares worldwide) US – 47% 1st place, UK – 7% 2nd place – this truly puzzles most.  The second of my How can this be?

The answer – governments don’t grow GDP – businesses do.  Some would say – especially libertarians like myself, maybe if the government remained shut down in America or shut out in Wellington we could all get on and – produce, consume and transfer wealth.

Now there’s a thought.

The fourth economist to hit the news this week is our very own (well – nearly) Dr Oliver Hartwich – the executive director of the New Zealand Initiative.  The initiative is a ‘think tank’ formed to combine the NZ Institute (left wing) and the Business Roundtable (right wing).  His thoughts on NZ Housing and NZ financial literacy are spot on.  He shows his European conservatism however when choosing to asset allocate into a balanced fund (KiwiSaver) and European emotionalism when generally trusting money women (Angela Merkel or Christine Lagarde perhaps) more than money men.

You can read about the Nobel laureate award for Eugene Fama and why we (FSB4 Financial and the FoxPlan Group) use international index funds for our investors – www.nzwealth.co.nz/blog/ – and information on Dr Oliver Hartwich at www.oliver-marc-hartwich.com/in-the-media/property-obsession-pricey.

The information provided in this blog is not intended to be a substitute for professional advice. You may seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances.