Culture values are behind everything we do, so it will come as no surprise that they also influence the economic policy choices of government leaders. Culture also affects the reactions of the people to those policies, creating a vicious or virtuous circle, depending on how you prefer to look at it.

The funny thing is, culture values even affect people into thinking that economic policies are rational. They are not.

We all like to think that political leaders who make decisions on economic policy, and the economists who provide the scientific support for the decisions, are all looking at issues with the best of their analytical capabilities. We tend to forget that they are all human and as such are unconsciously influenced by their emotions, their personal values and the values of the culture they were brought up in.

In Northern Europe and North America especially, there is an excessive valuation of rationality, to the point of denying the equal importance of values and emotions. There is still in place a long-outdated belief that beliefs are less important than reason… What a paradox! Because, indeed, the notion of a “supremacy of reason” is, in itself, a value-judgment.

Reason, values and emotions

As we examine both macro-economic problems and also micro-economic problems (business management issues), we need to understand that they are not driven by reason, but rather by equal amounts of reason, values and emotions. Without looking at emotions and values, any analysis will be incomplete and will lead to erroneous conclusions and mistaken solutions.

In macro-economic terms, the (wrong) consensus among economists has been that our troubles originated in the fact that governments have spent too much. The ensuing conclusion has been that governments need to spend less in order to balance their budgets.

Initially, the general public tends to agree with the diagnosis and also with the proposed solution, although the fact is that they do that for the wrong reasons. People make the mistaken analogy with their own personal budgets, thinking that when they spend too much and incur in excessive debt, the way to fix that is to simply spend less. Austerity is the solution. “I have been spending more than I should; I have been misbehaving; I need to restrain my indulgence, exercise more discipline.”

A new-born baby has no self-restraint. When it is hungry, it eats to maximum capacity. It doesn’t stop until filling the belly completely. And when it feels like pooping, farting or pissing, it does all of that, often at the same time. No restraint. It is only as it grows older that the baby learns, from its parents, that pooping anywhere you want, anytime you feel like it, is “not good”. Also, eating sweets before mealtime is “not good”. The baby is not allowed to survive only on Oreos and as it grows older it learns to follow a balanced diet, exercise regularly and enjoy everything responsibly. It also learns that everything good in life is either illegal or fattening.

Throughout this process, we develop a feeling called “guilt”. Hundreds of books have been written by psychologists about guilt: how important it is for driving socially acceptable behavior and how damaging it can be when there are imbalances in it. Too little guilt breeds psychopaths, such as serial killers, politicians and investment bankers. Too much guilt breeds psychotics, neurotics and religious fanatics (although some of the latter are actually psychopaths in disguise).

Help, the paranoids are after me!

As Freud once said, we are all neurotics, to some degree. We all have some degree of imbalance in our guilt, that is: we sometimes feel guilty about something that we did not need to feel guilty about.

This (finally!…) leads us back to austerity. We all have a certain feeling that we probably should save more and spend less, even in places like Germany and China, where the savings rate is much higher than in the US, where spending is actually bigger than earnings (resulting in debt). Actually, in places like Germany and China, the predominant values of the culture are precisely that it is more important to save for the future rather than indulge in spending in the present. And THAT is the reason their savings rates are higher.

Because of this guilt about spending (for some people the feeling is bigger than for others, but we all have it to some degree) we are quick to agree that “austerity” is good public policy. It’s a knee-jerk reaction, a reflex without thinking. Saving money is good, no matter what the circumstances. It means exercising restraint and we have learned since early childhood that restraint is “good” and lack of restraint is “bad”. This is such an ingrained belief, such a strong value inside us, that we react emotionally against anyone who challenges it. So, naturally we support governments who talk about austerity.

Not only that, but we are also quick to condemn those countries who apparently have been spending too much, like a brother-in-law who spends all his money on fast women and slow horses, then comes to you asking for a personal loan. However, we need to realize that countries are not exactly like annoying brothers-in-law.

In first place, the spending of countries is basically decided by their government, not exactly by their people. No government holds a referendum about the budget for next year. So, it’s unfair to blame the Greek people in their totality for a situation that was not created deliberately by the Greek people in totality. It is actually much more complicated than that.

The same kind of awareness needs to be in place about our own country’s economic policy. Emotionally, we may feel that austerity is the right medicine. Besides, we’ve also been taught that the best medicines are the ones that taste the worst… And we swallow them as punishment for misbehaving.

This tastes awful… so it must be good medicine!

“Yes, Mom and Dad, I misbehaved, I feel guilty and I need to be punished, as punishment allows me relief from my feeling of guilt, and then everything can be all right again and we can start over.”

It works in psychology for an individual, but it does not work like that in economics for a country. We need to come to terms with that distinction, once and for all. The way things are right now, the countries with the toughest austerity policies (like the UK) are punishing themselves into a deep hole, like an individual who feels so guilty that he ends up committing suicide.

Many Brits have been brought up with familiarity to strong punishment, even physical punishment at home and in classrooms. The debate over the abolishment of physical punishment in schools was very controversial in Britain, with many standing up and defending physical punishment, arguing that “it builds character and resilience”. So perhaps these people think that economic recovery should necessarily entail a lot of hardship, the more, the better.

Well they should seek their masochist satisfaction in other ways. As the commercial success of “50 Shades of Gray” demonstrates, there are a lot of people out there who like reading about sex and punishment, perhaps secretly wanting to be punished, and many willing to provide the means of satisfying that demand. This should be about literal and literary screwing, not about the economic kind of screwing which punishes millions who have done no wrong and do not deserve it at all.

Therefore, we should direct our wish for punishment to other channels and let the economy recover through policies that really make sense for recovery. These policies involve more government spending, to stimulate demand and create jobs.

The tailor of Porto Alegre

Some economists argue against it, fearing that more spending and “quantitative easing” (the euphemism for printing more money) will generate inflation. They are right, to some extent. In theory, when you have too much money circulating, it stimulates increases in prices, which amounts to inflation. In practice, what we have seen in the last five years is that we are a long distance away from inflation. The additional money that has been put in circulation has not had an inflationary impact, because… it is not circulating.

The Fed’s injection of a few trillion dollars in the system has caused an inflation… in stock prices only. The Dow Jones index is now at the same level it was (just over 14,000 points) before the crisis began in 2007, exactly six years later. The money ended up in equities, which is indeed a way of financing companies, but in reality the companies have not turned the influx of capital into more production and more jobs.

Corporations and banks are all sitting on the money. The cash reserves of companies and financial institutions have never been so large. The private sector is not spending, is not investing and is not generating jobs. It’s up to the public sector, the government, to spend, invest and generate jobs.

The difficulty is accepting that this is not a “bad” thing, because it seems to go against our values and emotions. Even though we have no solid rational arguments, we just “feel” that “it’s not right”. We need to become aware that we are supporting austerity for emotional reasons, rooted in our childhood, and not because it will actually solve our economic problems. We may feel righteous about austerity, but we are plain wrong in adopting it as an effective solution to our economic problems.

When you see people protesting against austerity in Greece, Italy or anywhere else, they may be right… Emotionally, austerity may feel like the right thing to do, but in order to resolve complex economic issues we need to look at it from all angles: emotions, values and reason.

And we need to understand that simply printing more money will not solve the problem. Basically, there is already too much money in the global economy. That’s not the problem.

Paulo Nardin was my tailor in Porto Alegre, back in the 70’s and he used to state a simple truth: “money doesn’t disappear; it just changes hands!” People talk about the economy saying “there is no money in the market”, but the issue is always that somebody is sitting on the money. My tailor went on: “When business is good, I make suits for entrepreneurs and executives. When the economy turns sour, I make suits for lawyers and bankers. There are always some people making money and some people losing it.”

The simple & stupid approach

Yes, we all like simple solutions. We like the KISS acronym (Keep It Simple, Stupid). However, the stupidity may also be in over-simplifying complex issues. As one of my former colleagues used to say “for every complex problem there is usually a simple and WRONG solution!…”

In companies, when profit goes down the knee-jerk reaction is to cut costs. There are two stupid mistakes most companies engage in when doing this:

1)     they immediately assume that increasing revenue is impossible, so they take that option off the table and focus on costs alone; and

2)     they find it easier to simply cut costs across the board and issue directives that have become hallmarks of stupidity, such as: “we must reduce 10% of our costs”.

It’s amazing how many large multinational corporations still make such gross mistakes in the 21st Century.

Revenue can always be increased; but it takes more intelligence and effort than it takes to cut costs across the board. You need to come up with different sales strategies, new products, creative ways of approaching potential clients. That takes creativity and intelligence.

Cutting costs also takes creativity and intelligence, if you want to make it work. Cutting 10% across the board is as stupid as telling yourself “I have to lose 6 kilos, so I will just amputate one of my legs, that should do it! It’s quick and straightforward, does not require a lot of thinking… no time wasted, now I can go back to doing the stupid things I was doing and that got me in this mess in the first place, DUH!!”

Cutting costs across the board means that units which were over-spending will continue over-spending, but they will just over-spend 10% less… While units who were doing a good job of maximizing output with minimum expenses will now have to severe an arm and a leg to comply with the stupid directive, hurting the business even more by reducing their capacity to generate revenue.

It’s the same with countries, by the way: austerity measures usually diminish the overall economic activity, which means the government collects less taxes and therefore increases its deficit. It makes things worse, as the UK is so brilliantly demonstrating since 2011 for all the world to see.

In order for cost cutting to work, it needs to be replaced by cost management, which means taking a critical look at all your processes and finding SMARTER ways of doing things, which will cost less and generate more revenue. It’s all about process optimization, something that doesn’t get enough attention. You may find that some units can reduce 25% of their cost, while others can only reduce 2%. The issue is: asking people to use their brains before reaching for the scissors (or the chainsaw).

In some cases, it may be necessary to spend more, to make investments, in order to increase efficiency and maximize productivity. It also takes a different emotional attitude when you say “we need to fix the economy, let’s discuss how can we invest one trillion euros to stimulate growth”. The key is, of course, to invest wisely, and not just throw money at the problem.

The smartest investments that companies and countries can make usually are related to education and development. Not simply in acquiring more knowledge, but also in learning how to think critically, how to act ethically and how to understand the emotions driving people’s behavior.

Business leaders, politicians and economists should start with themselves: learning how to develop their rational, emotional and ethical capabilities; then generate the means for all others to do the same. We can probably solve any issue more effectively if we start by looking at the issue from these three angles: reason, emotions and values.

www.lcopartners.com                                                        http://fernandolanzer.com                                             www.itim.org

See also my book “Take Off Your Glasses” at amazon:

http://www.amazon.com/s/ref=nb_sb_ss_c_0_15?url=search-alias%3Dstripbooks&field-keywords=fernando+lanzer&sprefix=Fernando+Lanzer%2Caps%2C345