Employee number matters

Currently improving productivity by applying advanced technology is the mainstream; however, we still need to recognize that employee number matters. Based on the 2015 statistical release from UK Department for Business Innovations and Skills, we can see that firms with larger employee numbers generally have higher productivities than firms with smaller employee numbers, as firms with larger employee numbers (over 250 employees) employ 40% of the employment and generate 53% of the total turnovers while firms with smaller employee numbers (under 50 employees) employ 48% of the employment but only generate 33% of the turnovers. With more employees, firms are able to hire specialists of advanced technology that help to improve productivity and employees tend to have specialized skills. On the other hand, when a firm has a limited number of employees, to hire specialists may not satisfy the need of its business. For example, in a small store, hiring a skillful accountant is too expensive and has lower returns than hiring someone who has a GCSE maths certificate and speaks nicely. Moreover, when a lot of people work together, they can learn from each other and sometimes it also creates a competitive environment. These all help to improve productivity. Therefore, improving productivity by applying advanced technology does not mean limiting employee numbers. Actually firms with high employee numbers usually have higher productivities as they employ more specialists.

A key factor missing in many reports - small business growth

In the UK, 99.9% of all businesses hire under 250 workers and even only 0.6% of the 99.9% hire over 50 workers. However, the small businesses hire 48% of the total employment and only generate 33% of the total turnovers. The employment and turnovers clearly show an economy of scale that the larger firms have greater productivities than the smaller ones. The number of the small businesses increases faster than the number of the larger businesses. This is very easy to understand that it is much easier to establish a small business than a large one. However, the productivity of the entire economy could be pulled back by the increasing number of small businesses. It is definitely wrong to limit the increase in the number of small businesses, as all great businesses have experienced their early "little" period. I think that to improve the productivity we should encourage the expansions and growth of the small businesses. The growth of small businesses has been ignored by many government reports, including some reports from the parliament and the Bank of England. Usually we focus on how many new jobs are created in the entire economy and each sector of industries instead of in different sizes of businesses. It is difficult to precisely measure the growth of small businesses in terms of the number of labours employed as small businesses are much more flexible to change their number of employees. To ease this problem, we might be able to use the costs of labour as our measurement. The cost of labour does not only depend on the number of employees, but also depends on the quality of employees. It can give us a broader image of how the small business is growing and help to create policies to help small business growth and improve productivity.

How did we falsely predict the Brexit referendum result?

The outcome of the "Brexit" referendum surprises the "elite" class, especially many investors. Most of the previous polls turned to be in favor of remaining in the EU. Based on these polls, the market had been very positive before the referendum and risen sharply on the day before the 24th of June. As the result of the referendum showed that the "out" won by around 3 percent points, there must have been some biases about the poll surveys. Facebook and some other social networks showed that the "in" would dominate the "out". This is a very bias survey. Most on the social networks are relatively young and have not experienced the age before the UK joined the EU, this group of people is definitely in favor of remaining in the EU and is not a good sample to represent the entire population. Moreover, some Internet surveys have similar problems, some senior people use the Internet to receive information rather than to share their opinions. There is another problematic survey: doing a survey in London. From the referendum result, we can see that almost 60% of the Londoners support to remain in the EU while most other regions in England oppose to this idea. There are many other problematic methods, such as asking for company opinions, expert opinions and etc. To conclude, the failure of making an accurate prediction of the referendum is due to selecting a biased sample to represent the entire population. In addition, the process of running a survey (for example, running an Internet survey) could eventually lead to a biased selection of the sample.

Who will suffer more after "Brexit", the UK or the EU?

"Brexit" will affect both sides after it actually happens, which I believe it will happen without a second referendum. Although the details of the process of Brexit are not clear currently as the article is not triggered yet, there are several things that are clear. The immigration law will be changed that the leave side politicians imply there is going to be a cut in the number of migrant labours, especially the EU migrant labours. The trade deals will be adjusted, but the details are not clear. Britain want the previous trade deal or even a more generous one; however, many people are afraid that Germany will react revengefully to the Brexit. The multinational firms will adjust their business depending on the new trade deals, which could determine the future UK unemployment rate. Of course, there are many other changes in the UK laws and etc. As they have less influence on the UK and Europe economies, I only want to focus on the effects of the coming new immigration law and trade deals. Currently the UK has its historically low unemployment rate while some EU member countries like Greece have very high unemployment rates. After Brexit, the UK unemployment may rise, but the European unemployment rates may rise as well. The EU migrant labours may be forced to leave Britain, then the employable population on the European continent will rise. Of course, there will be new jobs created on the continent after "Brexit"; however, the new jobs are more concentrated in the countries like France and Germany, which have already had low unemployment rates, other than the countries with high unemployment rates. Therefore, the countries with high unemployment rates will not benefit from Brexit, but may suffer a rise in the unemployment rates. In addition, without the financial support from Britain, Germany and France may have greater financial pressures and become tougher when negotiating about the aids to the EU member countries that have financial difficulties. Finally, the new trade deals will make huge differences on both sides. A revengeful trade deal is a disaster for both sides. Britain has a trade deficit with the rest of the EU, when high tariffs are applied on both sides, both sides will have higher costs of exporting and importing and their products will lose competitiveness in the other market and we may experience an increase in living costs as the imports become expensive. Britain may be able to make trade deals with countries in other places of the world due to its geographical advantages. Some inland EU countries may lose Britain as an important trade partner. Overall, the biggest problem facing Britain seems to be the new trade deal after the article is triggered; however, some poorer EU countries may suffer more than Britain as their unemployment rates may rise, their financial difficulties may become worse and they could lose Britain as an important trade partner.

Memo of "Brexit"

My writing is based on newspaper materials, my own observation and some other official and unofficial materials.

The outcome of the referendum had never been very clear before the 24th of June; however, the odd is that the "in" campaign seemed ahead of the "out" campaign in the most of the period. There was a short period before the referendum that the poll showed the "out" campaign led ahead. But by the 23rd of June, most predicted that the "in" would win the referendum. This was written in many media and the market also showed the same that most stock markets rose ahead of the referendum. The outcome of the referendum surprised many people. The markets fell sharply on the 24th opening. Some researches on the referendum were biased as they focused on London, where the "in" was the majority, some focused on the youth as they were doing online researches that the younger generation is the major consumers of the Internet. Some experts think that the older generation helped the "out" campaign win the referendum. The majority of England and Wales supported the "out" campaign. Some Scottish politicians ask for another Scottish independence referendum.

How to face greater risk?

After "Brexit", people feel that there is a greater risk ahead. How do we deal with greater risks? There is a definitely wrong way to deal with risks. Sometimes people find that the returns in different states of their investment stay the same but the risk increases. Taking higher risks should award with higher returns. When your risk increases, you should either lower your risk or try to increase the expected returns in more risky states. After the referendum, people could lower their risk by buying insurance securities. People may increase their returns by betting on the probability of a financial crisis, like what Soros is doing. It is also okay to bet against such state by increasing holding of some "undervalued" securities.

What does "Brexit" really mean?

The result of the referendum has surprised many people, as many people, including me, previously believed that the British people would not vote out. An article suggests that the parliament technically does not have to make Britain leave the EU even after the referendum; however, I do not think this will be the case, as the parliament would become unpopular if it takes such action. So let's talk about the situation after Britain leaves the EU. Firstly, the Scottish independence and even the North Ireland independence may be reconsidered, as the majority in Scotland and North Ireland vote in. Secondly, the benefits of the multinational firms in Britain will be damaged, this means that there could be a decrease in job positions and some Europe head offices will be moved from Britain as well. This could cause a big damage on the British economy. Thirdly, the trade between Britain and other European nations will be affected by Brexit. Finally, the financial market may be driven into a crisis. The surprised result may lead some financial institutions to double check their debtors's abilities to pay back their loans. As the business of some multinational firms could be badly damaged, their abilities to pay back their loans will be doubted. Some of their bonds are rated as AAA, which means large financial institutions buy their bonds with short term negative rates. Once these bonds are downgraded, the values of the bonds will depreciate rapidly and it will cause a domino effect that other AAA-rated bonds will depreciate in their values. This will lead to a collapse of the bond market, as investors sell off their depreciating bonds with very limited market demand. Therefore, Brexit is not just a risk in Europe, it is a global risk as well.

Big organizations

There are many big organizations. Some are powerful and, some are powerless. Usually when one organization has limited goals and members do not have much interest conflict, then the organization is relatively more powerful. When one organization is founded to solve many problems, the organization becomes weaker as they do not have sufficient resources to target so many problems at the same time. In addition, when members in one organization have conflicted interests, obviously the organization cannot be powerful as members cannot unite together to solve problems. Currently we have many sorts of organizations. The powerful organizations include the US National Rifle Association, the OPEC and etc. The relatively weak organizations include the UN, the WTO and etc. The members in these organizations have conflicting interests, thus weakening the power of the organizations. It is more suitable to call these organizations summits rather than organizations that they offer their members opportunities to negotiate with each other. I think that companies are similar to organizations, therefore they should have similar characteristics to make themselves powerful.

When thinking two sides

There is never a perfect answer to any real world problem and all solutions have their pros and cons. The most direct measurement to value the effectiveness of these solutions is to calculate their expected outcomes. However, we have to know the probabilities of all states. Moreover, it is not very accurate to use the historical record to estimate the probabilities, as the reason I have already discussed in one of my other blogs. To know the probabilities is entirely impossible; however, it is important to find an estimating method. To estimate the probabilities, we have to know the cause of each state. If it is a natural risk, such as earthquake, we can use the historical record, as the causes of such risk relatively remain unchanged. However, when it is caused by the uncertainty of human behaviour, then we can set up a model to estimate all people's preferences and as we assume all people maximise their personal profits, then we know they have several winning strategies and based to their winning probabilities we can estimate the probabilities of their different strategies. However, the disadvantages of such method is it requires a huge database and complicated data analysis processes.

What's the next to draw people's attention after "Brexit" referendum?

Currently the voting on the "Brexit" draw the most attention of the market; however, after the referendum, what will be the next to draw people's attention. The first big event could be the US presidential election that if Trump is elected, there may be some surprising changes in the US politics. The second issue may be if the Fed will hike the rates. This has drawn people's attention since last summer. The third issue may be the rise of the unemployment rates around the world. As the UK and the US unemployment rates reach their historical low and the numbers of new jobs created decline, it is very likely for the UK and US unemployment rates to rise again. This could affect the UK and the US economies as well as other economies around the world due to the importance of their economies; therefore, when other economies are affected, the unemployment rates could rise as well. These are the three major issues after the UK referendum; however, we also need to be aware of the EMs slowdown and the Japanese deflationary pressure.

The risk of continuing stimulus

IMF urges Japan to redouble economic stimulus as it seems Japan cannot reach its inflation target of 2 percent. I think that there is an enormous risk of such continuous stimulus. Firstly, an economy will become more and more dependent on the stimulus policy if the stimulus policy continues for a long period. Secondly, the effectiveness of the stimulus policy will weaken over time. People will fully understand the effectiveness of the stimulus policy and may even underestimate the future effectiveness of the stimulus policy when the policy continues for a long period of time. Thirdly, when people benefit from the stimulus policy, the government will face greater opposition to withdraw the stimulus policy, especially when the economy is used to the stimulus policy. Fourthly, it can widen the wealth gap involuntarily, as the economic stimulus benefit the businesses first. Therefore, I believe that government should always set a time length for its stimulus and must execute the deadline.

The prediction of the "Brexit" referendum

I think that Britain will stay in the EU for a greater chance. Firstly, most of the businesses will benefit from staying in the EU. Secondly, staying in the EU will win support from the middle and upper classes of the British people. Thirdly, the assassination disguises people and may make some of Brexit supporters change their mind. Fourthly, the "staying in" group has increased their advertising effort. Many respected figures have expressed their support for the staying in. Based on these four reasons, I think that the staying in will win greater support.

Does history repeat itself?

People usually say that history repeats itself, but is it true? If we believe in the concept of "cycle", such as a business cycle, it seems that history repeats itself. However, we often find that although history "repeats" itself, there is a trend that changes the history overall. Moreover, the details of each period are different that people have different momentum to generate growth and make different mistakes that doom the economy. Even sometimes the results are different, but people just group results into two categories, good and bad, this makes history seem to repeat itself. Therefore, because we classify our observations too simple, we often make wrong conclusions and see history repeats itself subjectively.

Is there any industry that we cannot specialize

We usually talk about how specialization improves productivity and generates additional economic growth; however, there is a question in my mind that if there exists some fields that we cannot apply specialization. Specialization does not work very well when the work can have many different states. If we apply specialization, we need many people to specialize in only one state and only one state will actually be dealt with once we observe the state. This is a waste of resources. To deal with this situation, we can have two solutions. The first solution is to forget about specialization and allow people to work in all states. The second solution is to let a computer do it for us. The advantage of a computer is that it can be programed to specialize in all states with specialized algorithm. Trading is a classic example that people need to handle many different states; and computers are doing relatively better job than us human beings.

Opportunity cost

When people are making decisions, people do not precisely know their opportunity cost, as due to lack of information, people do not know what exactly their options are. Moreover, people do not judge their opportunity costs fairly. People often realize their "opportunity costs" after events have taken place. They see the outcomes of other options as their opportunity costs, this is not fair. Because they ignore the risks of other options as they do not necessarily have the same outcomes in all states. Therefore, I think that only the options that people recognize before taking action should be  taken into account as opportunity cost; moreover, people should consider expected outcomes rather than absolute outcomes.

Match-fixing is immoral, illegal and costly

People like watching football (Euro2016 is taking place currently) and some firms run football gambling business, which is legal in some countries. Match fixing is considered as a strategy to gain huge profits. Is this statement true? In some situation, it could be true. When there is only one dominated party in the game, it can use its dominated power to fix the match and defeat all other parties in the game. However, next time, there will be fewer parties participating in the game, the profits earned by match-fixing is diminishing. In addition, match-fixing in many situations is costly. If there is no dominated party in the game, then all parties can bid up the cost of fixing the game in order to earn the profit. When there are many parties participating, the profit will decrease to zero. Moreover, even when they are trying to fix the game, the result might not be certain that there is still some small probability that the result may be different from you expect. With good skills of actuary, firms could come out with similar risk but lower costs. Therefore, in a mature market, firms have no incentives to fix matches as such strategy is too costly and risky (legal risk).

Is it really possible for Britain to lead the EU?

I read an article on Financial Times today called "Britain: A time to lead rather than leave the EU". Is it really possible for Britain to lead the EU? Firstly, the reason for Britain to join the EU in the first place is that the rest of Europe is the largest trade partner of Britain, having a trade deal matches the Britain's best interest. Secondly, the largest economy in the EU is not Britain, it is Germany.  For Britain to lead the EU will be costly. Britain has already had a relatively dominated position in the EU. To lead the EU means Britain has to extend its budget to further fund some of the EU members, which is Britain is always avoiding to do. Moreover, because Britain does not join the Eurozone, the only thing wanted by Britain from the EU is that the EU could ask Britain for fewer returns, which can never be achieved by leading the EU. Leading the EU is actually going in the opposite direction. Therefore, I think that Britain has no reason to lead the EU, as it is fair to say that all Britain wants from the EU is a piece of the current trade agreement.

What would the British government do if the people decide to leave the EU?

If the British people decide to leave the EU, then there will be a lot of questions facing the British government. The British government has to negotiate new trading deals and political and military cooperation deals. Moreover, the British government has to deal with the existing EU workers in Britain. The current government or even the future government prefer the option of staying in the EU and other nations may also want Britain to stay in the EU; therefore, it is possible for the British government to negotiate with the EU and make some deals which have no significant differences from the EU pack.

Complete free trade is not a fair game

Free trade without any restriction, such as tariffs, seems wonderful, but will widen the wealth gap. If we started free trade with all countries having the same productivity level and it was always peaceful, that would be perfect. However, countries started civilization at different times and have different progresses. When a country has higher productivity and technological innovations, it can be easier to exploit other countries on the earlier phases. Therefore, if we start free trade right now, we may find many developing countries may become like some African Americans in the American society that compared with other ethnic groups, they are stuck at the bottom of the society although they compete with others with equal opportunities.

Risk-free may create risk

Several big asset managers, including Bill Gross, talk about the problem of the current negative rate situation. The bonds with negative rates are all considered to be less risky or even risk-free. Such state may force investors to look for some longer period investment, which could worsen the liquidity of the financial market. When the liquidity worsens, there will be a supply shortage in the market. The costs of financing from the financial market will be much more expensive. Some businesses may fail to refinance themselves and fall to bankruptcy, especially the smaller businesses. When the smaller businesses become more likely to fail due to the illiquidity issue in the market, the big businesses become even more attractive and gain bargaining power. So the wealth gap between the big businesses and the small ones widens. The big businesses will increase their gearing levels as borrowing becomes extremely cheap, and finally become potential bombs in our economy as they carry too many debts.

The biggest winner of the rapid EMs growth is the developed world

The slowdown of the emerging markets has led to the question of if the developing countries are able to catch up with the developed world. The past dramatic and rapid economic growth of the EMs was mainly driven by the manufacturing boom due to their cheap labour forces. When the emerging markets are growing, the people's incomes in the EMs also increase. However, the biggest winner is the developed world. Firstly, the multinational firms benefit from the cheap labour costs and generate greater profits. Secondly, the people in the developed world, especially the middle and upper classes, work in the higher value adding positions, which means their jobs have much higher incomes than the jobs in the EMs. Thirdly, goods are produced at lower costs, priced lower. The prices of goods in the developed world decrease sharply; however, as these products are produced in the EMs, the prices are generally flat in the EMs. This causes the purchasing power of the people in the developed world increase much faster than the purchasing power of the people in the EMs. Therefore, maybe the rapid growth in the EMs benefit the people in the developing world, it has actually widened the wealth gap between the developing world and the developed world.

"Big data" problem

We use many statistical and mathematical processes to analyze data in order to find the correlation between some certain variables we want. However, the problem of such process always exists. We can always omit some important but unobvious variables. Moreover, even when we find there is a strong correlation, we may still be uncertain about the causality between the variables. Of course, we can always improve our methodology and reduce the impacts of all sorts of errors. However, firms which analyze data to serve their interests need to put their models in a game theory model as all parties tend to run similar analysis.

Only the big matter?

It seems that only the US, China, the EU (especially Germany, France and Britain) matter to the world economy. Maybe some OPEC countries could influence the world economy by affecting the oil price, but as currently they could not meet any agreement in the meeting, their influence will be much weakened. The three economies I just mentioned are the three largest economies. People always say that globalisation makes our economies more interacted; it is partially true as it is only true if the economy is significantly large. Japan is another large economy. It does have some influence on the other economies, especially the Asian economies. However, in terms of the global economy, it becomes much less insignificant. As we can see that the Japanese economy has been in a bad shape for decades, the world economy is going on a different path. The Brazilian economy is in recession, but it seems that there is no influence on the world economy. It is not because only the biggest economies matter, it is because when we are talking about the world economy, we only take the largest economies into account and leave out the rest of the world. Although these three economies could represent a large part of the true economy, it is still worth to take all economies into account with different weights which depends on their population sizes.

Economic research

The origin of economics study is to study how to make nations wealthier and greater. It was more about designing a model to allow nations to grow stronger. One of the examples of such economists is Adam Smith. Afterwards, economics study turned to look for ways to solve some real world problems. Modern days, economics study has been diversified that some try to find out the causes of some economic phenomenon, some try to develop solutions to solve some current economic problems. However, most of the economists do not try to build up a new economic system that replaces our current system. I think that the cause of this is because of Karl Marx. Karl Marx did set up a new system that actually partially contributed to the chaos of the Cold War. Nowadays, no one believe that a systematic change can lead to a perfect world, which shows now people become more rational and less optimistic.

Advertising does not need to be excellent, but definitely can't be pessimistic

I read an article talking how the advertise of financial firms fails to attract female investors. It is really interesting that it shows how much we can be influenced by advertising. Generally, we believe ourselves to be rational and make our choices independently; however, this is definitely not true as firms must find advertising useful so they keep spending on it. In many cases, the priority of advertising is to let potential customers know their brands. Leaving customers some useful and interesting details about the products can help to increase the demand for the products. However, the article I read shows something interesting that the negative side in advertising has greater impacts than the positive side. We are loss averse that we care more about our losses than our gains. Therefore, it is crucial that ads have to be designed very carefully that it can have limited details about the positive side of the product, but it definitely cannot have any context that may allow people to associate with any negative side of the product.

Is sanction a smart way to beat an enemy?

The UN sometimes uses sanctions to force some countries to stop certain actions which could create chaos. These sanctions are sometimes led by some superpowers to weaken their potential threats. However, do the sanctions work? In most cases, the first hit by a sanction is the people who live in the “punished” country. And the gime of the country can use the sanction as a propaganda to increase the hate with the country, which makes foreign countries harder to influence the country’s politics. Moreover, placing an economic sanction could not only shrink the enemy’s country, but also may weaken your own economy as well. Every country has its own comparative advantages, when losing one trading partner due to a sanction, the exports and imports may suffer from it. The sanction may not affect the economy as a whole, but it could potentially directly destroy some businesses which focus on businesses with the sanction-target country. Overall, I think that a sanction cannot destroy one regime, but can make the “enemy” unite and fight back. In addition, economic sanctions damage both sides.

The inflation can be globalized

The inflation rates vary between countries; however, the countries with similar income levels can transfer their inflation or deflation to other countries and narrow the inflation gap. Currently people are easier to shop from other countries, and information has passed very quickly. Once one country is experiencing a surprising deflation, people in other countries may pay attention to the news and start to shop in that country. The increase in the exports can rebalance the supply and demand in the market and increase the inflationary pressure in the country. Meanwhile, as people in other countries can buy cheaper goods and services outside their countries, the consumptions in their countries will decrease and release their domestic inflationary pressure. Therefore, the deflation has been transferred from one country to other countries. Vice versa, inflation will also be transferred among countries. Therefore, the inflation rates of countries with close income levels tend to be similar.