Deadly sins and tall buildings
Understanding greed, money and the maths underpinning it
Recently I tried making energy bars: I placed a bunch of healthy stuff (nuts, oats, honey, protein …) in a dish, pressed hard and left them in the fridge. Voila! The mess didn’t gel together so I just ate it immediately. My upset stomach led to a deadly sin being the focus of this article – but I am not focusing on gluttony but greed.
Greed may be viewed as the underpinning of capitalism and has arguably led to significant life improvements over the past two centuries.
And yet, the work of people like Albert Einstein or Nicola Tesla was motivated by curiosity and the joy of pure human advancement, not dreams of getting rich. The profit motive may explain why their inventions saw the daylight, but it is also possible that greed led to their inventions’ abuse.
Money is a beautiful invention. While bartering might work, I’m not interested in exchanging your goat for my potatoes. Yet for all its wonders, I struggle to define it. It should be a medium of exchange but then collects interest on itself, giving it the guise of a commodity.
Finance ourselves to the moon
The current low interest rate scenario helps large corporations borrow at cheap money. For example, a corporation has €10 million at hand but needs €40 million to develop a site that it estimates to sell for €100 million. It borrows €40m by issuing bonds at 7% secured on the €100m investment – hence it should be able to pay up its €40m debt if it goes belly up. In the interim that’s more than fourfold of profit from the initial €10m for the corporation and our grandmothers are happy with the 7% made on bonds.
Leverage, that is, the process of maximising one’s investment through debt as above, makes us all winners. The little fish who financed the deals are getting a good return (better than leaving money at the bank) while the big guys are helping the economy.
This is an immediate win-win-win as even the government gets more taxes paid in. Immediate is a great thing. After all isn’t it better to have money now rather than in future? Isn’t it better that I ate a whole tray of raw energy bars that could feed a family for a couple of days immediately?
Finance ourselves to ruin
That is a limitation with discounting, the process of evaluating today’s value of future income. For example, €100 in a year’s time might be worth €90 today; €100 in two years’ time worth €80 today, and so on. Using this process, ten €100 payments each at the end of the year are worth €90+€80+…+€10 = €450.
Putting a value of €1 for each energy bar, the present value of eating a bar each day for ten days could be €4.50, but eating them all now is valued €10. It is perfectly logical, even if irrational, to eat them at one go immediately (a pedantic reader might point out that discounted perceived utility is to be used - if you thought of that, give yourself a pat on the back).
You can see how the argument can be extended to other profit seeking ventures.
What is money?
I don’t know. It helps to see what good our money is doing – discussions of boycotting certain firms are superfluous if they weren’t over funded from the start.
Like the prodigal son, Dominic is returning to Malta. You can tell him where he can pick up his celebratory goat on twitter @domcortis.