Thursday 21 July 2011

How a Trip to the Pub Reminded Me, ‘There’s No Such Thing as a Free Lunch’

I’m always on the look-out for articles that educate, stimulate and generally challenge my view of the world. This week I found one in an unexpected place: the JD Wetherspoon pub chain’s company magazine. Sitting in the pub, leafing through the magazine, I was anticipating finding commentary on their latest pub openings and newest real ales. Instead I found myself reading an intelligent editorial piece on the troubles in the Eurozone by Tim Martin, Chairman of JD Wetherspoons.

While criticising the Euro is now in fashion due to the sovereign debt crisis, Tim Martin has long been opposed to the idea of the single European currency. He recounts in his article how he campaigned, in his capacity as a business leader, against its introduction in the UK. At the time, the accepted wisdom in intellectual circles was that the Euro would strengthen trade with Europe and would be an asset to the UK economy. He came up against politicians, economists and financial journalists all clamouring for its acceptance. But, along with hundreds of other citizens who rejected the idea of surrendering more powers to bureaucrats on the continent, he vocally rejected the Euro.

He characterises the debate over the Euro as pitting the intellectual elite, with their neoliberal economic agenda, against the ordinary citizen who values local freedoms (such as the control over our own currency) more highly than the theoretical benefits of global integration. And in the case of the Euro, his side appears to have won.

This got me thinking whether simple, unsophisticated, folk wisdom might triumph over complex theorising in other areas of business and finance. For example, how much management theory applies in real life? Do economic models include too many assumptions to really reflect reality? Is all the effort we spend making quantitative forecasts really much better going with your gut feeling?

One piece of folk wisdom that the world of business and finance would do well to learn from is “you can’t get something from nothing” (or, more familiarly, “there’s no such thing as a free lunch”). This simple maxim seems to have been forgotten in the pursuit of quick profits – but the profits prove illusory when the hidden costs are taken into account. For example, in business, switching to a cheaper supplier might seem like an easy win – but no switch comes without risks that might end up costing you. In finance, increasing your leverage is an easy way to flatter your return on equity – until a crunch arrives and you wind up with nothing. In economics, keeping interest rates low seems like an easy win in terms of stimulating the economy – but excess credit sows the seeds of the next bubble.

How the Eurozone debt crisis plays out will be fascinating and potentially terrifying to watch. As such, I am thankful to Tim Martin and others for opposing the Euro in the UK. And I am also grateful to him for reminding me that even the best theoretical ideas frequently fall flat on their faces when confronted by reality.

1 comment:

  1. It's always easy to look back at world events and find people who opposed them and turned out to be right, but that doesn't mean that their objections were well-founded at the time. If I said I'd opposed the Euro on the grounds that I thought pound coins were more aesthetically pleasing, that doesn't make my advice worth listening to in the future.

    If you're right, and simple folk wisdom is correct more often than the currently fashionable complex theories, I'd still contend that we shouldn't blindly follow Grandma's advice next time. Instead, we should be trying to identify which elements of Grandma's thinking give her the edge over the professional economists, and build some new predictive theories based on these.