A story of value and leverage

This night, as I try to sleep, I found a tweet complaining that a minister in Malaysia is trying to reduce the minimum income from RM 1500 to RM 1200, citing that is to incentive employer to employ locals instead of foreign cheaper worker. There are many problematic factors here, which basically translate to, increasing or reducing the minimum income may not change anything to locals. It just shows that the politician are not very clever. Why even bother? It’ll just ruin your reputation.

To be clear I’m in no position to empathise on the fate of locals. I’m a programmer, unlikely to have much problem finding jobs. For now at least. But this is my blog, so I’m gonna write anything I want.

Nothing is free

One thing is for certain, nothing is free. Whatever you buy, your phone, your internet, your house, someone will need to make them. Everything have cost, and nothing is free. Lots of Malaysian seems to think that the government create money out of thin air. Well, the central bank does that, sure, but economic power does not come out of thin air. There is a saying that, if the government increase the salary of public worker, then the price of items will increase. We call that inflation, which surprisingly in Malaysia, can be affected by the public sector’s salary.

I like to think about it like this. There are two ways to get money, by creating tangible value, or by leverage, which I like to think of as “moving value around”. Leverage usually exist for security reason, it protect something or someone, or it exist simply because people have yet to find a way around it. Example of getting money by creating value is farming. You work, you get food, something tangible. Example of leverage is opening a shop that sell someone else’s farm product.

Of course, the shop produces some value, it advertise and distribute the farm product. But if you know where to get your farm product, and there is no cost in distributing the food, it would be cheaper for you to buy directly from the farmer. For you, the value is the food, not the shop. The shop is an inefficiency.

Now imagine, if you have one farmer and ten shop. Will there be enough food to go around? That in essence, is the problem. If there are more people that get money by leverage, there are more inefficiency in the system, the economic value is spread thin across too many people, many which do not bring value to the community.

Example, dropshipping. The only real value is marketing. The distribution is handled by some transport company, the product is made by another company, the website is created by another company. What do the dropshipper provide? If the end customer know where to get the source of the product they could get it cheaper. We say that the end customer could get better value.

Another example, someone buying up properties to rent. What are the values? I don’t know, risk of getting bankrupt I suppose, and some flexibility. What about providing a living space? No, the real estate developer provide that. If you could pay the real estate developer directly, not only do you have a living space, but you would own the house, at least part of it. What do the renter bring to the table, a little bit of security and a lot of inefficiency. Worst, you don’t have a choice, you must live somewhere. This is one of those things where no one really have a good way around it so far.

Leverage is bad

An entity with a lot of leverage is inherently more inefficient. A company with a lot of middle manager that provides little value have to support more people. Such company can get outcompeted by another leaner company that produce the same amount of value with less people, hence, less cost.

In theory, competition would drive cost down. A company that produce more value, would outcompete another company that produce less value. Unless, the more inefficient company have leverage. This is bad for the customer as in the end, the customer would receive less value for the product.

Government offices are great example of this, as government have no competition (locally at least). In fact, any government linked employment, or near employment have this issue. Think about having your IC copied at a JPJ office. What are their value? What are their leverage? Yet, they charge RM 1 a pop. The fact that they are doing side business clearly shows that there are not enough tangible values being spread around there. Too much leverage.

National automotive company are another great example of leverage at play. They have large amount of internal rebates and less import tax that their cost is lower compared to companies outside the country. However, for the same amount of cost, company outside of the country can produce much better product. The end value to the customer is lower. You are essentially paying twice the normal price for your car.

Leverage is good-ish

However, national automotive company also provide more economic values to the country as the money they receive goes back to the community, probably. Which is a very good point, and a good use of leverage, the protect something, the economy of the country. But here is the thing, if the local company need more people to produce the same amount of value, the local company is not a very good company. It is inefficient. Probably poorly managed. What if outside company, which are better managed, produce the product locally instead?

Here is the thing. Well run companies are methodological, precise and have good, probably quantifiable reason to do things. If they are not such, they are not very good company. The very reason they don’t produce the product locally, is because they could produce more value, outside the country. If they produce the product locally, they may need more people to produce the same amount of value. Increasing the cost of people will bring even quantifiably less reason for the good company to produce product locally. It’s nothing personal, it’s just cold calculated business.

To make matter worst, with little reason to improve, as they are protected by the government, local company can sit comfortably not producing much. That is why you are stuck with either, poor product from local company, or expensive good product from other country.

Nothing is free

In the end, within the isolated community, the people within the community themselves must produce value. Nothing is free. You either work hard, or work smarter. You plant more food, or use machines to plant more food. But a large proportion of the community must produce value.

This is also, the reason why ideas such as universal basic income is unlikely to happen in Malaysia. The value must come from somewhere, with enough quantity as to meet the “basic income”.

Education does, produce value out of thin air. However, it is pointless in my opinion to focus on having people studying hard, going to universities. Only some people are suitable or even capable of studying to that level. In the end, without enough economic power in the country, they are better off going outside the country anyway. Any values they produce will be spread out across many people anyway.

Worst, higher education are value multiplier. They produce farming machines, but there must be farmers to use those machines in the first place. People must create value in the first place, in order to have those values multiplied.

RM 1500 is nothing nowadays. The lower bound, in terms of producing value is too low in Malaysia. The focus should now be on those that do not go to University, do not go to boarding school, future Mat Rempit. Heck, there should be less university. If you are targeting everyone to have university level education, you might as well make all school have university level-ish education. Don’t give people fishing pole, teach them how to farm fish.