Tag Archives: Marx

The time value of money

One of the odd things about this blog is that though I work in finance, I rarely write about it. Partly this is to keep my blogging life and my work life separate, but perhaps that separation is greater than it need be. Shortly, I plan on publishing my review of Karl Marx’s Capital. In writing that review, it became necessary to critique Marx’s dismissal of the notion of the time value of money. However, I recognise that not all of you are necessarily chartered accountants or have A-levels in economics. So you may not have heard the term before. If you have, and are aware of it, you may happily go about and read something else unless you want to pick my analysis apart. For those for whom the term does not mean something precise, then I hope this will sharpen up the concept in your mind, though I apologise if this comes across as patronising.

The concept of the time value of money should be one that you find fairly instinctive. I’ll demonstrate this with a few examples. Firstly, I offer to you a sum of money, let’s say £100. You can have that today, no strings attached. Or I could ask you to wait a week and then I would give you £110. Which is more valuable to you?

You have a choice between a smaller value or a greater value in the future. Can you wait for a week or is your need for the cash flow so great that you would settle for a smaller sum, effectively forfeiting £10?

Another trade-off would be if I offer you £100 now or £101 in ten years’ time. Which is more valuable to you?

I would hope that in the first case, waiting is the better option for you and that in the second case it is better to take the guaranteed sum now. Yet all this hinges on a level of subjectivity. It can vary from person to person or from business to business. The trick is to try to find an equivalent rate whereby the current value is equal to some future value. For example, if our choice was between £100 now and £105 in a year’s time, then would you “um” and “ah”, being unable to work out which is more valuable to you. If you put the money in a bank would you get a net rate of interest of 5%? If you could get more, then it’d more rational to put the £100 in the bank and get more interest, so at the end of it you have more than the £105 you might have had. If the net interest rate is lower, is there another way by which you could get a greater return in one year? If not, then your best bet is the £105 in a year’s time.

So the time value of money is expressed as an interest rate, being the rate that you would consider reasonable for a rate of return if given the opportunity to have a different sum at a future point in time.

One of the consequences of this is that higher interest rates are associated with higher levels of risk. You may have heard the phrase, “high risk, high return”, particularly if you’ve looked at choices for pension investments or if you think back to the global financial crisis of 2008, particularly with regards to the critique that the high risk aspect was ignored by the bankers whose actions played a significant part in precipitating the financial meltdown.

In my view, a part of the reason for this was that the fundamental subjectivity of the notion of the time value of money was forgotten by the systematic use of the Black-Scholes formula for options trading. That attempted to turn finance into a science which is a category error. Risk cannot be accurately quantified and it is a mistake to try to do so. Measures such as interest rates are indicative, so one looking at bonds can tell that a rate of 7% is riskier than one offering 2%. I know this personally quite well as I had considered changing my ISA some years ago and found the best rates of interest available to UK investors were to be found in Iceland. I even got so far as to the have an application form on my living room table. But I was suspicious about the high interest rates and, coupled with the relative devaluing of the Icelandic Krona against the Pound, I hesitated. Two months later those Icelandic banks collapsed. They were offering a high return because they were high risk investments.

The other aspect to think about is inflation. This is another reason why I stated at the top that the time value of money should be fairly instinctive, even if the term is new to some. Inflation is the creeping rise of prices of various goods, services and assets. If you have a fixed sum of money then it’s value decreases over time. In my childhood, £1 could buy you four packets of sweets with change left over. Years later, £1 might leave the shopkeeper asking for the rest of the money if you try to buy a single packet. So looking at cash as the arbiter of value is inherently flawed. What we can do is ask about what is known as present value.

What this does is look at future (generally fixed) payments and ask how much is the sum of those payments worth at today’s values. For example, the rent on my one bed, mouse-infested and rather cold flat is £11,700 per year. Let’s say that that rent doesn’t change for 10 years. Is the present value £117,000? No, because in 10 years’ time £11,700 will not be worth the same as £11,700 is today. I need to employ my subjective interest rate, my measure of risk, to do a calculation. Yet even that calculation will be assuming a constant rate of risk, but who knows what the future may bring?

If anything, that’s the point. The world of finance and of economics in general contain a great many unknowns. Those who would profess to declare with confidence exactly what will happen in the future are generally false prophets. Look out for this in the economic arguments in the general election. There, politicians from party Y will declare unanimously that if party X is elected then the economy is doomed whilst at the same time asserting with equally misplaced confidence that if they are placed in stewardship of the economy (though I doubt they have the humility to use the term stewardship) then all will be well. This will be on top of party X and party Y making promises on the other’s behalf.

I wouldn’t trust either who take such an approach to finance, but I would also warn against placing trust in finance in the first place. Believe me, I’m an accountant!

Book Review: Socialism – Utopian and Scientific by Friedrich Engels

This is the third and final work in a single volume which also contains The Communist Manifesto and The Condition of the Working Class in England in 1844. This work was written much later in Engels’ life, and as such represents his more mature view, having noted that his contribution to the earlier two works took place when he still relatively young.

One might be hard pressed to call it a book in its own right, as it is more of an extended pamphlet, running to a little under 70 pages long; even then the introduction takes up over a third of its entire length! For the sake of familiarity, I will choose to continue to call it a book.

So what of its content?

The lengthy introduction is largely about materialism. Specifically, it is a statement of materialism’s superiority as an idea than anything that any religion has produced. It is not an argument as such, as there is no real reasoning put forward other than an appeal to a few named philosophers (including Hobbes and Hegel). If we put that aside for a bit and look at the points Engels is trying to make, it becomes clear that his idea of religion is little matured from when he co-wrote The Communist Manifesto. It remains a caricature of (predominantly) christian belief that is asserted, but not evidenced.

Getting onto the main substance of the book, Engels looks at what he refers to as Utopian Socialism. In particular he looks at the style of socialism advocated by Robert Owen, whose influence upon socialism, communism, the early labour movements and the trade unions cannot be understated. Engels states that Owen’s motivation, that of creating a better society, is flawed, that it is utopian and that instead another model must be sought.

I’ve yet to read any of Owen’s work, though what little reading I have done around him (a little knowledge is a dangerous thing!) indicates to me that his motivations were far more similar to those that I knew when I lived and worked around the old mining towns of the north-east, whose input into my life have helped shape my socio-economic-political views. It is a socialism that is borne out of compassion, where all people are seen as and treated as equal. But Engels will have none of this.

The rest of the book is dedicated to the other half of the title: Scientific Socialism. Though this is a rather idiosyncratic use of the word ‘scientific’. It is rather dependent upon dialectic materialism, though Engels is at a loss to say what dialectic means, let alone his (and Marx’s) particular interpretation of the word. So Engels comes back to the opening The Communist Manifesto by stating that it was a great “discovery” of Marx’s is that history can be boiled down to a statement of class struggle. Opposed to the idea of all being equal, Engels maintains his view that there exists two distinct classes and that one is better than the other. That the working classes must rule and that the bourgeois must be smashed. This is not a view of socialism that I can agree with. I pointed out in my earlier review how flawed this historiography is, but its place here confirms it as one of the pillars upon which communism rests. Its unreliable analysis is one reason why I could not be a communist.

Another reason is Engels’ reliance on materialism. Again he asserts that is the right view, superior to others, but he does not engage in a critical argument, but merely assumes that he is right. Or rather, he assumes that Marx is right, as the main evidence for it seems to be in Das Kapital which, when referenced, is given all praise and no critique. There is no serious consideration for non-materialistic viewpoints, and as such there is no engagement with this. The argument, such as it, stands alone, in a vacuum. In other words, Engels urges us to adopt his point of view because there is no other. There is a place for putting forward one’s views in such a manner, as it might be impossible to take into account all relevant views, but it left me no more in favour of Engels’ flavour of socialism than I was before.

Ultimately, the book is lacking in arguing for a point. Engels relies too much on telling his readers that his points have already been proved instead of actually trying to prove them. In this sense, it is an attempt at persuasion by repetition. If you say something enough times, in uniformity, then that ingrains itself in your head. Such is the method by which shamanistic chanting, or liturgy, works.

This concludes the single volume work which contained this and the other two works of Engels noted above. In trying to educate myself as to the origins of communism, there remains one major lacuna my reading. The work reviewed here references it repeatedly, so it is to that work which I must turn next. It of course, Marx’s Das Kapital.

Book Review: The Age of Revolution by Eric Hobsbawm

There are times when one picks up books on hearing of the death of the author. Sometimes they are authors who you have never heard of before; sometimes they are those you are aware of but have never got round to reading any of their works. Hobsbawm was in the latter group. Knowing that he had written his “Age of…” books and his concept of the ‘long 19th century’ this was the obvious place to start.

That said, I must admit I had been puzzled by the statement that was a “Marxist historian” as I was unsure whether it meant he was an historian who was a Marxist or whether he was an historian of Marxist ideas. I am guessing you are probably more familiar with Hobsbawm than I, so you will know that the truth contains both of these but is not really either. It is that he looks at all history through a particular viewpoint. It is as though he has a particular set of glasses on which allow him to see certain things but which also hide others. Though to the casual reader, probably the most obvious manifestation is his constant use of the word ‘bourgeois’ which got to irritate me after a while.

The twin revolutions which he begins with are the French Revolution and the Industrial Revolution in Britain. From the outset, he acknowledges that he is focused on the history of Europe from 1789 until 1848. The work is split into two parts: the first looking at the origins of various aspects of the period, the second looking at outcomes. This division is somewhat artificial and each chapter tends to scan the whole period, so there is some going back and forth. If anyone wanted to read a purely chronological history, then this is not the book for them.

Compared to likes of ancient historians such as Herodotus or Thucydides, Hobsbawm not only writes about a different era, but his historiography is entirely different. He covers this late on this book where he talks of the emergence of modern ways of doing history. Here, we have not so much a recounting of facts and discourse as though that were the entirety of historical study, but it is the analysis which links events idea, motivations, etc. which are the backbone of Hobsbawm’s work. Above all, though, the differentiating feature here is the economic history. He looks both at wealth and poverty and the motivations of each in the realm of revolutionary history. i.e. what are the conditions that create the appetite for revolution and those that create a resistance to it?

In answering these questions (which are implicit, Hobsbawm doesn’t ask them directly) we are presented with a complicated narrative, a tapestry of threads which pull together eventually to form a coherent picture. That picture is most definitely shaded in a particular way, which may well rub some people up the wrong way. That said, it illustrates very well the idea that no history can be told wholly neutrally. What you choose to include and omit and how you present it will inevitably betray the historian’s own thought process. This is something the reader of history simply has to bear in mind.

One of the reasons this particular era held so much interest for me was that it partly covered the period I studied at school for my GCSE history. In particular, one of the early topics that fascinated me was the Chartist movement, and that features heavily here. The take on it here was very different from that which I had at school, as my history teacher was a staunch Thatcherite. To hold the two views in balance is an interesting task for the reader and not particularly easy.

If there was any great disagreement I had with Hobsbawm is that at times he had a tendency to state what the aims were of the more conservative figures in his history. Here, I felt that Hobsbawm had looked at the outcomes of their actions and interpreted those as aims, seemingly downplaying the possibility that the thought process at the time may have overlooked these matters. In other words, he was projecting onto others his own conclusions. Any historian faces this as a possibility, though it came across more prevalent to me in this work than in most others.

While this is a weakness in the book, it is also an example of the book’s greatest strength; that being his great boldness. To read The Age of Revolution is to be challenged by it. One thing you cannot do is read and ignore Hobsbawm. He will provoke a reaction in any thoughtful reader, whether that be in violent agreement or vehement disagreement – or likely a mixture of both. One might certainly dispute his declaration that Marx was the greatest thinker of the 19th century; I certainly know a few Darwinists who might dispute that idea, and I can think of a few mathematicians and physicists who could challenge for such a title.

I intend to follow up with the sequel, The Age of Capital, though maybe not until 2015. There are other voices for me to engage with first, not least Marx himself. So do expect further reviews of The Communist Manifesto and Das Kapital this year.