Rostra 293

rostraeconomica nummer 293

February 2013

[email protected]

Knab: de vernieuwing van de bankenwereld

the payments of CEos. Are they worth it?

Price bubbles. How they rise and burst even faster

tHE valuE oF valuE

t o many, value seems to be a hard concept to completely grasp. Money is probably one of the first measures of value most people come up with.

But then the question arises, what makes something very expensive in terms of money? Is this really just a simple question of supply and demand? Then again, something can be very valuable to you without it being worth a single euro if you would wish to sell it.

The fact that value can be hard to determine, even by a government, is shown by a recent event in The Netherlands. In December of last year, the Dutch government held an auction of so-called fourth generation spectrum rights. These rights will allow telecommunication companies to provide even faster internet to mobile phones and tablets. When preparing for the auction, the government expected to raise somewhere in between 400 to 500 million euros. Eventually however, the total revenue was around 3.8 billion euros, outperforming the expected return by almost 1000%. Too bad for us, the government was quick to release a statement that this financial windfall would not lead to the abolishment of any of the ongoing budget cuts.

In this edition of the Rostra Economica we will look at the concept of value from very different angles. One is to look at the value of education, especially how this might change in times of crisis. Another article looks at the (to some)

tHE diFFErEnt sidEs oF valuE

excessive payments CEOs receive. Is this simply justifiable by the work they get done, or are there other processes at work? Also, the workings of price bubbles and the gold market are investigated in two separate articles. A special remark this time on the introduction of several new rubrics. The book review is back in the Rostra, and each edition we will discuss a book we highly recommend you to read. On page 41 you can find FEB Abroad, which lets FEB-students reflect on their time studying abroad at a partner university. The rubric What history tells us puts the spotlight on a historic happening or person, linking this to the theme. Finally, Economics from the outside discusses how economic science is perceived from and interacts with other parts of our society.

For me, the concept of value is still not completely clear, although it is obvious that is has a lot of different sides to it. Value in monetary terms, which can somehow disappear straight away, value in terms of your education, value in terms of experience and what not. Perhaps value is simply a very personal idea and it’s hard to create one clear definition that fits everyone and everything. For me, my experience here as the editor-in-chief has been very valuable, meeting new people and experiencing new challenges every issue, but this is value is hard to quantify. Luckily, I still get to do this for 2 more issues, but rumor has it that the search for the new editor-in-chief has started…

text Bart Hoffmanneditor-in-chief--------------------------image Bethany Carlson/ sxc.hu

Bart Hoffmann is 22 years old and a master student of Economics.

--------------------------------------------------------------------------------------------------------------------------------editorial rostraEConomiCa 3

--------------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------------4 rostraEConomiCa --------------------------------------------------------------------------------------------------------------------------------

Would you pay 60 times something’s value? – Well, you already do.all companies have to make profit, so it’s understandable that they charge consumers more than their products are actually worth. But sometimes their markups get a little bit out of control. it’s a good idea to know, how much we overpay for our goods, since some of them are really not worth it. Products with some of the highest markups.

tHE rostra CHart

Brand clothing250%

Cafécoffee

and tea300%

Hotelminibars

400%

Eyeglassframes1000%

movie theater popcorn1275%

Prescription drugs1600%

Bottled water

4000%

text messages

6000%

Wine and champagne

400%

-------------------------------------------------------------------------------------------------------------------------------- rostraEConomiCa 5

--------------------------------------------------------------------------------------------------------------------------------

41 44

203622CoLoPHoN

Editor in chief Bart Hoffmann

Copy EditorsJules vosmoira Hooper

Editorsmaaike BootFloris dekterCorneel den HartoghKlara Keuteltim martensBerre simonseruben slotanela turuljadovile venskutonytePierre Borst

Photographernicole Koedooder

supervisory BoardWouter smeetsHanne van voordenlennart verhoef

reactions, letters and applications can be sent to:room E0.02roetersstraat 111018 WB amsterdam020 [email protected]

Columnistsroger PruppersJoop Hartog

Designdef., amsterdam (Yvonne roos)

Print run5000

address ChangesCan only be made through studielink, www.studielink.nl

advertisements PostnlPwCGrant thornton duisenberg school of Finance

advertisement CostsContact sefa and ask for aniel Ganga020 525 40 [email protected]

Printingdr&dv media services,amsterdam

Copyright Noticeany redistribution of part or all of the contents in any form is prohibited. You may not, except with express written permission by the editor in chief, distribute or commercially exploit the contents. nor may you transmit it or store it in any other website or other form of electronic retrieval system.

the value of our education. What is it worth in times of crisis?

society & social Economics. is the financial sector legalized crime?

the forces that determine the gold price

What history tells us. How did diamonds become so valuable?

amsterdamse Carrière Dagen 2013 will take place soon!

FEB abroad. stories of FEB-students on exchange

EN vErDEr

8 KnaB sCHudt HEt BanKWEzEn WaKKEr

12 tHE valuE oF CHiEF ExECutivEs

16 rostra EConomiCa is looKinG For a nEW Editor-in-CHiEF!

19 Column dr JooP HartoG

24 sEFa Front

26 PriCE or valuE

35 BooKrEviEW: HEdGE Fund marKEt Wizards

38 WHat arE PriCE BuBBlEs?

42 Fsr PaGE

46 FEB FlasH


Not the best-looking building in the world you might think? Whatever your taste might be, this is actually the most expensive ‘house’ in the world. located in mumbai and known as antilia, this 27-story building is owned by mukesh ambani, the CEo of the reliance industries limited conglomerate. the building is inspired on an indian tradition called vastu shastram which is believed to be conducive to the movement of positive energy. nevertheless, it isn’t missing any of the features you can imagine: 6 floors of parking, a lobby with 9 elevators, an ice room to escape the heat with man-made snow flakes and even a 4-story garden. according to Forbes, antilia is currently the only house worth over 1 billion dollar in the world.

photoshikher's imagery Photograph by shikher singh


--------------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------------8 rostraEConomiCa the value of value > interview met rené Frijters--------------------------------------------------------------------------------------------------------------------------------

textBerre simonse--------------------------imagedef.

Berre simons is 21 years and a master student Financial Economics.

Wat is de opzet van Knab? Knab is een bank die mensen helpt om slimmer om te gaan met hun geld. Door gemakzucht maar ook des-interesse laten mensen onnodig geld liggen. Wij helpen klanten pro actief en slim om te gaan met geld. Het uit-gangspunt is dat wij denken vanuit de klant. Een duidelijke vorm van geld laten liggen is dat men rood staat op een betaalrekening maar nog wel geld heeft staan op de spaar-rekening. Banken brengen aan de ene kant vijftien procent rente in rekening en aan de andere kant betalen ze er maar twee procent. Wij zorgen ervoor dat er automatisch geld wordt overgemaakt van je spaarrekening naar je betaal-rekening met een seintje dat je aan je spaargeld zit. Zo kost het je geen onnodig geld. Een ander voorbeeld van hoe je slimmer om kan gaan met je geld is gerelateerd aan je pen-sioen. Wanneer je rijdt in een lease-auto is er vaak sprake van een pensioengat, waardoor je fiscaal voordelig kan pensioensparen. Stel dat je 5.000 euro mag storten op je pensioenrekening, dan kan je dat aftrekken en dan spaar je nu belasting uit. Als je met pensioen gaat dan zit je waar-schijnlijk in een ander belastingtarief dus betaal je effectief minder belasting, dat is slim met je geld omgaan en daar helpt Knab bij.

Wat krijg je bij een basispakket van Knab? In een basispakket zit een betaalrekening -inclusief een wereld betaalpas- waarbij de klant inzicht heeft in zijn in-komsten en uitgaven, het kasboekje. Daarnaast kun je een

rostra schoof aan bij rené Frijters, de oprichter van de nieuwe consumenten-bank Knab. Knab is het omgekeerde van bank met de K voorop van klant. Het motto lijkt verweven te zijn met zowel de bank als de heer Frijters. Hij heeft hart voor de zaak en het is duidelijk dat er een ambitie is om de financiële industrie op zijn kop te zetten. als oprichter van alex vermogensbank is het hem al gelukt de beleggings-industrie te hervormen en wij geloven in een nieuwe revolutie die hij wil veroorzaken.

KnaB sCHudt HEt BanKWEzEn WaKKEr

spaarrekening of vermogensbeheerrekening openen, een deposito afsluiten, heb je de mogelijkheid om een finan-cieel dashboard te creëren en kan je een financieel plan opstellen. Op je dashboard kun je een overzicht krijgen van je gehele financiële situatie inclusief diensten en schulden uitstaand bij andere banken. Op basis van deze informatie kan je een prognose maken voor de toekomst. Je kunt financiële doelstellingen zetten en zien hoe deze te bereiken zijn, maar je kunt ook verschillende scenario’s bekijken. Zo kan je bekijken wat er zou gebeuren met je financiële situatie als je bijvoorbeeld je baan kwijtraakt, ziek wordt, arbeidsongeschikt raakt, of wat een overlijden zou beteke-nen voor je nabestaanden. Wij zijn de eerste bank in Nederland waarbij je zelf online een financieel plan kan maken. Ook werken wij samen met een netwerk van adviseurs, dus persoonlijk advies kun je ook ontvangen.

Welke klanten zou u willen aantrekken? De doelgroep van Knab zou je op twee manieren kunnen typeren. Op basis van mentaliteit zijn het de mensen die kritisch zijn. Mensen die slim willen omgaan met hun geld. Qua inkomen zijn het de mensen die een dubbel modaal inkomen hebben en/of een vrij beschikbaar vermogen van 50.000 euro of hoger. Het zijn mensen die willen bankieren bij een moderne bank die ze de zekerheid geeft dat ze eer-lijk worden behandeld en waar niet stiekem over de rug van de klant geld wordt verdiend. Daarvoor moeten de klanten wel bereid zijn de 15 euro per maand te betalen.

Waar hoort Knab thuis: tussen MeesPierson en Van Lanschot of tussen ABN Amro, ING, SNS Reaal en Rabobank? Als klant pas je bij ons als je alles graag zelf wilt doen en in eigen hand wil hebben. Als je naar de grootbanken kijkt zijn dit vooral de preferred- en private banking klanten, het hogere segment is typisch onze doelgroep. Ik zie ons zeker ook tussen de Van Lanschot en MeesPierson, afhankelijk van wat de klant wil. Willen zij heel intensief contact dan is Knab weer minder geschikt. Maar alle klanten die meer in-zicht willen in hun bankzaken en zoeken naar gemak zijn absoluut beter af bij ons. Wat is de reden dat u Knab heeft opgezet? Een van mijn drijfveren is dat ik het gevoel had dat er een efficiëntere bank moest zijn die meer gefocust op de klant was. Banken werken productgericht en hebben managers met productgerichte targets. De manager van de afdeling hypotheken moet zoveel mogelijk hypotheken verkopen, die van sparen zoveel mogelijk spaargeld ophalen. Wij denken vanuit de klant, vanuit de individuele situatie. Daarnaast zijn banken veelal gestructureerd rondom regels, hier denken wij wederom vanuit klanten. Zo hielp ik on-langs mijn moeder van 83 haar administratie op orde te brengen. Bij een van de grootbanken betaalde zij 1,50 euro per maand voor een rekening die ze niet meer gebruikte. Ik belde op om te vragen of zij die rekening voor mij wil-den sluiten. Dit was niet mogelijk en mijn moeder moest

--------------------------------------------------------------------------------------------------------------------------------10 rostraEConomiCa the value of value > interview met rené Frijters --------------------------------------------------------------------------------------------------------------------------------

persoonlijk naar kantoor komen. Mijn moeder is slecht ter been dus ik vroeg of zij mij kon machtigen zodat ik het kon doen. Dat mocht niet, zij moest persoonlijk langskomen om de machtiging te tekenen. Dit is pure bureaucratie, het heeft niets te maken met de klant. Vaak als je vraagt waar-om men naar het kantoor gaat, dan is het omdat de bank dat wil en niet omdat men dat zelf wilt. Over het algemeen zijn banken goed in het bepalen van regels maar slecht in het zich verplaatsen in de schoenen van de klant. Wij wil-len oplossingen die zoveel mogelijk gemak voor de klanten creëren.Wij hebben dan ook geen kantoren, want ik denk dat mensen helemaal niet naar een kantoor willen. We hebben wel een digitaal kantoor dus als je mensen wilt spreken kun je dat digitaal via de videochat doen.

Het tarief voor een rekening bij Knab bank is 15 euro per maand. Dit wordt in de markt als duur gepercipi-eerd. Hoe bent u aan dit bedrag gekomen? Als je een dienst van iemand afneemt dan is het niet gek als je daarvoor betaalt. In onze dienstverlening zit de garantie dat je bij een bank zit die je helpt om slimmer met je geld om te gaan. Zo krijg je bij ons rente op je betaalrekening die je bij andere banken niet krijgt en bespaar je boeterente om-dat je nooit meer onnodig rood staat. Daarnaast word je pro-actief gewezen op de financiële mogelijkheden die er voor jou zijn. Als je dat doorrekent dan is die 15 euro voor onze doelgroep niks. Een leuk ander voordeel zijn de kick-backfees die wij aan klanten vergoeden. Kickbackfees zijn verborgen vergoedingen die banken ontvangen als zij beleggingsfondsen verkopen van derden (bijvoorbeeld een Fidelity fonds bij ABN Amro). Deze vergoeding ligt tussen de 0,5% en 1% en banken ver dienen hier heel veel geld aan, zonder dat de consument dat weet. Bij Knab is deze vergoe-ding voor de klant en bij een portefeuille van 50.000 euro ligt deze dus tussen de 250 en 500 euro per jaar. ‘Knab is dus niet duur, maar Knab is oprecht en transparant’, aldus de heer Frijters.

Toch zien we in andere industrieën een verplaatsing naar het Easyjet-business-model, lage instapkosten en extra betalen voor alle additionele services. Denkt u dat er plek is voor een business-model met hogere instapkosten maar verder geen additionele kosten? Het verschil is hier dat er bij banken erg veel wordt ver-diend zonder dat klanten daarvan weten. Wij hebben in-derdaad gekozen voor een business model waar er oprecht geen geld wordt verdiend via de achterdeur. Ik denk dat mensen na alle schandalen en de crisis het wel beu zijn als ze na drie jaar toch blijken meer te hebben betaald dan dat ze hadden verwacht. Wij gaan uit van een oprechte dienst, maar er moet wel verdiend worden. Heeft de crisis geholpen bij het opzetten van een nieuwe bank of heeft de crisis schade toegebracht door

door GEmaKzuCHt maar ooK dEsintErEssE latEn mEnsEn onnodiG GEld liGGEn

Cv rENé FrijtErs2010 - nu Knab oprichter2008 - 2010 tJommiE Founda-

tion vrijwilliger1996 - 2007 alex Beleggersbank

mede-oprichter en CEo

1996 – 2007 vEB Bottom-line mede-oprichter en CEo

2006 dsB Bank directeur sparen, Betalen en Beleggen

1984 – 1996 diverse organisa-ties iCt-Consultant

1981 - 1984 Koninklijke marine reserve officier

1978 - 1981 Hogeschool voor Economische studies amsterdam (HEs) Bachelor, Bedrijfsinformatica


--------------------------------------------------------------------------------------------------------------------------------

toenemend wantrouwen van klanten naar nieuwe financiële instellingen? Wij zijn begonnen in 2009, dus we zaten net na de crisis. Maar het staat eigenlijk los van elkaar, wij hadden het ge-voel dat er meer transparantie en innovatie moest komen in de financiële wereld. Deze verandering is mogelijk versneld door de crisis maar ik geloof dat deze omslag er anders ook was gekomen. Zijn andere initiatieven zoals de gratis applicatie FIN-box waarbij ook een beter overzicht wordt gecreëerd in je geldzaken niet meer van deze tijd? Dat zijn enkel producten en niet een geheel nieuwe bank. De Fin-box is alleen een hulpmiddel om een volgende efficiencyslag bij grootbanken te realiseren. En daar zit het verschil met Knab. Grootbanken denken vanuit zich-zelf en zijn voortdurend bezig om kosten te drukken door de klant het werk te laten doen. Bij Knab denken we vanuit de klant. Hoe kunnen we het de klant zo gemak-kelijk mogelijk maken, zodat deze zo comfortabel kan bankieren.

Bij Alex heeft u een discount geboden op een algemene service en nu wilt u een premium voor een superieur product. Welke lessen van Alex neemt u mee? Alex was inderdaad bij de introductie goedkoper en beter, maar het is nooit opgezet als een discountproduct. Ik heb daar drie belangrijke lessen geleerd. Ten eerste dat je on-gelofelijk goed naar je klanten moet luisteren, dus doe iets niet omdat je dat zelf denkt maar omdat je met klanten praat en luistert. Ten tweede heb ik geleerd dat er behoefte is aan innovatie, als je innovatie aanbiedt dan heb je een goede kans om te overleven. Ten derde heb ik geleerd dat je een cultuur moet creëren binnen een organisatie waarbij alle mensen die bij je werken klantgericht zijn en hetgeen doen waar ze ook echt plezier in hebben. In grote organisa-ties is het vaak hiërarchisch ingesteld en iedereen heeft zijn eigen domein waar je niet buiten moet komen. Hier heb-ben we veel meer een cultuur waarin iedereen gelijk is.

Iedereen werkt vanuit eigen competenties en haalt het maximale uit zichzelf.

Zou u de bankenindustrie ook zodanig willen veranderen als hoe u met Alex de aandelenhandel heeft veranderd? Dat zou ik natuurlijk graag zien. Ik geloof er heilig in dat als je je klanten bedient, je dan vanzelf een succes wordt. Verdienmodellen van banken gaan structureel wijzigen. Als we elkaar over en paar jaar spreken dan betaal je bij alle banken minimaal 15 euro. Wettelijke regels zullen er voor zorgen dat banken veel transparanter gaan werken en tarie-ven omhoog zullen gaan. En linksom of rechtom moet je geld verdienen. Het provisieverbod dat per 1 januari 2013 is ingegaan, is hier een mooi voorbeeld van.

Wat zijn de doelstellingen voor Knab de komende jaren? Wij hebben nu als doelstelling dat we minimaal 120.000 klanten willen hebben over vijf jaar, maar ik denk dat als wij inderdaad onze klantgerichtheid behouden dat we ook het dubbele zouden kunnen bereiken. Wat we echt willen berei-ken is een bank die oprecht is met een product dat top is.

Wat zijn uw persoonlijke doelstellingen? Ik geloof in ‘leuke dingen doen’. Alleen dan kan je ergens succesvol in worden. Plezier is het belangrijkste criterium voor mij, je leeft maar een keer. Afgelopen twee jaar heb ik wel heel hard gewerkt en dan vraag je je af of dat nog wel plezier is, maar nu het eenmaal staat en werkt en mensen enthousiast zijn is het het absoluut waard. Nu vind ik het ontzettend leuk.

Heeft u nog tips voor studenten? Inderdaad plezier hebben in wat je doet en leuk vinden waar je mee bezig bent. Je studie is de basis van je toekomst en die moet in orde zijn. Ik heb een automatiseringsachter-grond en ben nu algemeen directeur van een bank. In mijn ogen is een studie een richting waarin je wilt werken, maar het hoeft niet te bepalen wat je later gaat doen.

Het doel is minimaal

120.000 klanten binnen 5 jaar.

--------------------------------------------------------------------------------------------------------------------------------are business leaders really worth every cent they earn? < the value of value rostraEConomiCa 13

--------------------------------------------------------------------------------------------------------------------------------textruben slot--------------------------illustrationsYvonne roos

ruben slot is a 21-year-old Bachelor student in Economics and Physics.

since the start of the current economic crisis, CEos of large public companies have come under fire from all sides for their supposedly oversized compensation packages. the public is loath to accept restructuring in the lower rungs of large companies while those in the higher echelons cling to generous salaries and bonuses. However, the discussion on CEo compensation is far older than the current crisis, and a vast body of economic literature is devoted to the subject of executive pay.

The main question relates to the value of a CEO’s labor: how is this determined? As it turns out, the methods used in the corporate world are far from exact and based on faulty economic assumptions. Nevertheless, the remuneration packages of corporate executives have been growing steadily over the last forty years.

It is no surprise then that the salaries of business leaders have been a contentious issue for far longer than the current crisis. Criticism has come not only from the “usual suspects” of left-wing or populist politicians but also from the right-wing part of the political spectrum and indeed from the business world itself. In early 2007, at the height of the last economic boom, then-President George W. Bush, Federal Reserve President Ben Bernanke and famous investor Warren Buffett – none of whom are particularly known for their political liberalism – independently criticized the large compensation packages of CEOs of large American companies. Additionally, calls have been made for governments to set legal restrictions or special taxes for bonus packages, which has been done in some European countries such as Great Britain and France.

Determining the compensationOf course, business leaders as well as some economic

tHE valuE oF CHiEF ExECutivEs

--------------------------------------------------------------------------------------------------------------------------------14 rostraEConomiCa the value of value > are business leaders really worth every cent they earn?--------------------------------------------------------------------------------------------------------------------------------

theorists have defended these high salaries, usually by stating that the market competes for excellence and that talented CEOs would walk away if offered a below-market salary. This thinking is reflected in the metric used to determine the size of compensation packages, which is the same across all industries and is as follows. In a process usually executed by a special remuneration committee, a so-called peer group is first designed, composed of firms that serve as a benchmark for the target firm’s compensation packages. The companies in the peer group are often in more or less related industries but are not necessarily of a size comparable to the target company, with Heineken for example using Unilever as a peer, despite the fact that that company’s total revenues are three times larger than Heineken’s. Subsequently, a standard salary is determined based on the salaries in the peer group. Almost always a salary is chosen that is at least higher than the median of the peer group – salaries that are below this level are considered below-market. Then, the remuneration committee determines the size of the short-term incentives and the long-term incentives, the value of which depending on the performance over one and three years respectively. Performance is generally measured by gross or net profit and total shareholder value. In general, the size of the total compensation package is also expected to match those of the firms in the peer group.

Needless to say, this method is far from exact, but for lack of a better alternative it seems to be the best way to determine the value of a CEO’s labor. However, this system of peer groups and benchmarks leads to pay increases that

are unrelated to the value of the executive’s work. This follows from the fact that remuneration committees automatically opt for a compensation package that is above the median of the peer group. Since companies tend to choose similar firms in their benchmark group, there is generally a group of companies within an industry that all have each other in their peer group. These firms start to bid up against each other to stay above the median: if the remuneration package of the CEO of one company is set above the median this year, it means that the salary of another CEO has dropped below the median. This will have to be remedied next year by a salary increase, which in turns pushes the compensation package of a third company’s CEO below the median, and so on. This cycle continues more or less indefinitely, limited only by a firm’s ability to pay a high salary. In short, the result is that the size of compensation packages increases in a manner unrelated to either the value of a CEO’s labor or his ability and skills for the simple reason that firms fear that their CEO leaves if offered a below-market salary.

A flawed reasoningThe idea that CEOs will choose to work at another business if offered a salary below the peer group median is in turn grounded on the assumption that executive skills are compatible across different industries. Proponents of this idea hold that there is currently a body of knowledge of economics, finance, accounting and management science that, once acquired by a CEO, is applicable in a wide range of business situations. In addition, the revolution in information technology implies that business leaders now have all the necessary company data available at a mouse click, opening up knowledge to them that was previously only acquirable through long years spent working in the lower rungs of the organization’s hierarchy. In a nutshell, excellent people can work at any firm, so if talented executives are not offered a competitive remuneration package, they will pack up their bags and move.

only 5 per cent of the variance in CEos’ salaries is explained by performance.

-------------------------------------------tHE disCussion on CEo ComPEnsation is Far oldEr tHan tHE CurrEnt Crisis


--------------------------------------------------------------------------------------------------------------------------------

Research on this assumption of skill transferability has shown that it is generally faulty. In the long term, CEOs attracted from outside of the company – and who thus lack the in-company skills that an insider would have – show a substandard performance compared to insiders. In a study from two Texan universities examining 192 outsider CEOs in the period 1993-2005, researchers found no significant correlation between the performances at the CEO’s old and new company. Another study investigating a large sample of public companies for the period 1986-2005 sought to provide insight in the differences between insider and outsider CEOs by simulating what would have happened if a firm with an insider CEO would have hired an outsider and vice versa. Their results were also unambiguously negative to the notion of skill transferability: the outside hires significantly underperformed as compared to the insiders. It is therefore clear that the main defense for outsized compensation packages is based on a faulty assumption.

Other defenses of high executive pay include the notion that great performers should be paid well. According to this logic, a CEO’s salary goes up if performance is strong and goes down if it is weak. However, a study that determines the size of this change in pay with performance found that only 5 per cent of the variance in CEOs’ salaries is explained by performance. Clearly, a poorly performing

CEO does not seem to have much to fear from a reduction in compensation.

The role of the governmentTo those averse to income inequality and high salaries in general, the fact that the logic behind the large remuneration packages of business executives is flawed provides ample reason to argue for government intervention. Would this make sense from an economic point of view? A recently published PhD thesis from the Erasmus University of Rotterdam argues that it does not – setting a legal maximum on total compensation increases the value of the average compensation package. Thus, by controlling the outliers – the highest earning CEOs – the salary of the average CEO increases. Although egalitarian in a certain sense, this does not seem to be the desired outcome.

A more realistic approach, but slower and less interesting for politicians, would be to focus on the shareholders. In the end, the shareholders pay the executives’ salaries; hence it is in their best interest to optimize them to secure a best-possible performance for the lowest salary. If this minimum compensation turns out to be lower than was previously thought – as is the case here – it is in their best interest to push the company in the direction of lower salaries. After all, the threat of talented CEOs leaving is a lot smaller than was feared due to the fact that management skills are not as transferable as previously assumed. In this way, CEO salaries might decrease without government intervention.

In conclusion, there is no valid economic argument for paying CEOs as much as they are paid now. This does not necessarily imply, however, that governments should step in, since intervention might do more harm than good. Instead, shareholders hold the key to lower executive compensation by insisting that their money be spent on more productive projects than the CEO’s generous compensation package. Why shareholders have not done so yet is another question.

-------------------------------------------tHE sYstEm oF PEEr GrouPs and BEnCHmarKs lEads to PaY inCrEasEs tHat arE unrElatEd to tHE valuE oF tHE ExECutivE’s WorK


the rostra Economica has started its search for the new editor-in-chief. With the first issue being published in 1953, the rostra Economica is the oldest faculty magazine of the netherlands and with a print run of 5000 copies also one of the largest. Five times a year the rostra is distibuted to all the students and employees of the Faculty of Economics and Business.

rostra EConomiCa is looKinG For a nEW Editor-in-CHiEF!

5issues/year


--------------------------------------------------------------------------------------------------------------------------------


april 2012

[email protected]

Interview: Allard CasteleinVP Environment Shell

Cars & sustainabilityRené Bohnsack a specialist at the FEB

Ranking Sustainability Easy exercise orMission Impossible?

sprEadIng sustaInaBIlIty

SEFA_RostraEconomica_289_def.indd 1 23-03-12 14:59

ROSTRAECONOMICA nummer 293

F ebruary 2013

[email protected]

Knab: de vernieuwing van de bankenwereld

The payments of CEOs. Are they worth it?

Price bubbles. How they rise and burst even faster

THE VALUE OF VALUE

SEFA_RostraEconomica_293_05.indd 1 25-01-13 16:50

RoSTRaECONOMICA nummer 292

november 2012

[email protected]

Charter Cities creating new cities to combat poverty

Voluntourism: personal gain vs. development aid

Entrepreneurship, capital creation and property rights in slums

DeVeLoPmenT aiD 2.0 conSTRucTinG neW PaTHS ToWaRDS GRoWTH



september 2012

[email protected]

Facebook's IPO. High expectations, mixed results

News.com New strategies for newspapers

Internet in India. Google lends a hand

INterNet LIfe NecessIty?



juni 2012

[email protected]

Interview: Pim van der Feltz CEo Google Benelux

Behavioral Economist Uri Gneezy on business experiments

Prof. dr. van Winden Neuroeconomics Economics & the Brain

SEFA_RostraEconomica_290_defst.indd 1 04-06-12 09:52

overall, being the editor-in- chief of the rostra Economica ensures that you gain very valuable experience in chairing a committee, improve you writing skills and that you meet very interesting people from all kinds of disciplines! if you are interested, send an e-mail to [email protected].

As the editor-in-chief you have several responsibilities. First of all, you manage the committee of enthusiastic editors to come up with new and interesting ideas every issue. Together, you decide upon the theme, topics for articles and interesting people to interview. In this process you are the person that makes sure everything goes smoothly, from planning the meetings to ensuring the articles are well-written and delivered on time.

You also take care of the external relations of the Rostra Economica. This means keeping in touch with the columnists, meeting with the faculty and working together with the designers to make sure the Rostra looks its best every issue. This aspect of being the editor-in-chief will ensure that you are right in the middle of the creative process of making a magazine, and give you valuable contacts for your future.

-----------------------------BEinG tHE Editor- in-CHiEF Has GivEn mE GrEat PraCtiCal ExPEriEnCE BEsidEs mY studiEs!

--------------------------------------------------------------------------------------------------------------------------------20 rostraEConomiCa the value of value > What history tells us--------------------------------------------------------------------------------------------------------------------------------

textdovile venskutonyte--------------------------imageistockphoto

dovile venskutonyte is a student pursuing a Bsc in Economics.

E very edition Rostra looks at the theme from a historical perspective. Whether discussing

an important economist in this field, an exceptional occurrence or simply telling a story that is known to very little people. This time a classic example of a cartel, that made diamonds as valuable as we have come to know them today.

Found on the necks of Hollywood starlets, in the Rolex watches of famous rappers and on the fingers of soon-to-be brides, diamonds are instantly recognizable symbols of beauty, status and love in our culture. When we think of the most valuable things, money can buy; these sparkly little bits of carbon are at the top of our list. However, diamonds did not gain this reputation because of their beauty, rarity or tradition. De Beers – one of the most powerful monopolies in history, almost single-handedly created the image and price point diamonds have today.

It all started with one manUntil the late 19th century diamonds were truly very rare. They could only be found in some rivers in India and Brazil. The very few gems were obtainable only to monarchs and aristocrats. However in 1870, tons of these stones were found in The Orange River in South Africa.

Diamonds were no longer scarce and were not seen as intrinsically valuable items, therefore their price plummeted and their suppliers started fearing for their investments. They knew that complete control of supply was needed to keep diamonds expensive.

--------------------------CECil rHodEs FoundEd tHE CountrY oF rHodEsia, WHiCH in tHE 1960’s BECamE tWo indEPEndEnt CountriEs: zamBia and zimBaBWE

Cecil Rhodes, a British miner and politician, took the initiative to form one of the greatest cartels in modern history. In 1888 De Beers Consolidated Mines, Ltd was created. It grew exponentially and at the turn of the century controlled 90% of the worlds’ diamonds. In 1927 the founder of a competing diamond company called “Anglo American”, Ernst Oppenheimer, became chairman of De Beers board of directors. He concentrated on making exclusive agreements with diamond buyers and suppliers, eventually making diamond trade outside of De Beers hardly

THE STORY OF A GIRLS’ BEST FRIEND

possible. The company decided how many diamonds it would sell, at what price and to which subsidiaries. It was a complete monopoly. Tons of these stones were excavated but only a very small portion was released into the market each year, this way supply was relatively small and prices stayed up. However, one side of the market was not enough, De Beers wanted to control demand as well.

A diamond is foreverDuring the great depression, diamond prices collapsed in Europe. These gems were still seen as a luxury reserved for the aristocracy and did not have the sentimental value they have today. Furthermore, the continent was about to go into war. Trouble in Europe made De Beers concentrate on expanding their sales in the US market. In 1938 approximately 3 quarters of all diamonds soled in the United States were engagement rings, however these were poor quality and relatively cheap stones. Therefore De Beers went to N. W. Ayer, a leading advertising agency, in order to persuade the American people to spend more on their stones. The agency’s research showed that the price and sales of diamonds have dropped since 1912, because the economy was not doing well and people were interested in competitively priced luxury products. N. W. Ayer came up with one of the most influential


--------------------------------------------------------------------------------------------------------------------------------

marketing campaigns in history in order to solve De Beers problem.

Diamonds were advertised as symbols of love. They were prominently featured in extensive magazine adds, shown in motion pictures, which were relatively new at that time, and given to celebrities and royal families. This campaign started the tradition of diamond rings being given during a proposal for marriage. Furthermore, it was found out, that women had a tendency to pick cheaper engagement rings, so De Beers took a step further. It convinced men that a ring should be a surprise and that women will think that more expensive rings are a greater expression of their partners’ love for them. Adverts were telling middle class men that a two-month salary is the appropriate amount to pay. Their campaign soon spread to other continents as well.

In the 1960’s De Beers started advertising diamond engagement rings in Japan. Before the campaign, arranged marriages, performed according to ancient traditions, were the common way to find a life partner. Not only did De Beers have to convince the Japanese that diamonds are romantic, they had to introduce the notion of romance to the country. Adverts showed women dressed in western clothes, participating in activities like bicycling or mountain

climbing, which were uncommon in Japan. The campaign made diamond rings symbols of progressive western values and the beginning of a modern era. De Beers changed a 1500-year-old tradition and by 1981 60% of marriages included a diamond ring.

--------------------------“Blood diamond” is a tErm tHat dEsCriBEs diamonds ExCavatEd in War zonEs and usEd to FinanCE armEd ConFliCts

20 years of aggressive advertising created a new generation to which marriage and diamonds were inseparable. Now people would rather pay for a pricy engagement ring over long periods of time than not buy one at all. In the late 1940’s the famous slogan “A diamond is forever” was created and today remains the main slogan of De Beers. Not only did De Beers make people buy rocks they

cannot afford, it also deterred them from ever selling their gems. Diamonds were viewed as something with intrinsic value and therefore forever belonging in the family. Now demand was almost compulsory and second hand supply unacceptable.

The legacyToday De Beers is not as strong as it used to be. Since the 1990’s new mines were discovered in Canada, some Australian mines left the company and an important partner – the Soviet Union, broke up. As a result De Beers lost market share. It is still a very large, extremely profitable and powerful company, but its influence is not as strong. However, their work is done. Not only did De Beers create an infrastructure, which allows companies to control supply, it made diamonds one of the most valuable things on Earth. It was a very large cartel that persuaded people that this particular rock was something very special, something no marriage or family is complete without. The diamond industry is worth about 30 billion dollars, but its value is not in the rock, it’s in our perception of it.

the Golden Jubilee is the largest diamond in the world; it weighs

545.67 carats or 109.13 grams.


E very year several analysts write reports on the development of the price of gold. In these

reports, taking into consideration general characteristics of gold production and gold demand, they predict the coming gold price. Some go on to argue that the gap between supply and demand will lead to a higher gold price in the future, in order to restore equilibrium. However, annual production of gold has only limited influence on the gold price.

Two kinds of commoditiesTo see that this is the case we first have to understand that there are two different kinds of commodities: flows and stocks. A typical example of flow variable is a commodity like coffee. After consumption, a flow variable simply disappears. This property has important implications for the development of the price. A flow that shows an annual deficit will have a higher price in the future because the gap can only be filled

GoldEn Bulls and dEFiCits

--------------------------------------------------------------------------------------------------------------------------------a tale of gold deficits and rising gold prices < the value of value rostraEConomiCa 23

--------------------------------------------------------------------------------------------------------------------------------

with existing reserves. As the reserve is used up the price has to rise to reach the equilibrium again.

In contrast, a stock is not consumed. In the case of longer lasting goods, annual supply and total supply of the commodity may be very different. The total supply is the relevant factor for the analysis of the price development of a stock. Gold is a stock variable since the major part of gold that has been produced still exists in form of jewelry or coins. The use of gold in production is very limited and the potential buyer does not care about when the gold was mined. Every new ounce of gold competes with every old one. Potentially every ounce of gold is for sale at a certain price. For some gold owners the spot price is too low but they would sell it at a higher price. Every ounce of gold should therefore be counted as supply because at a certain point in time the owner decides to sell their gold to use the value for something else.

Two kinds of demandThe analysis of demand for gold is more complex however. It consists of two parts. The first part is the exchange demand: how much is a person willing to give up for one unit of gold? The second part of the demand is the reservation demand: how much gold does a person that

owns gold keep off the market because she believes that the gold price will rise in the future? This part is expressed in the amount of gold that will not be offered at the market. If you add both parts of the demand you get the total demand. The quantity that potential buyers want to buy and the quantity that exists but that is not available sum up to the total supply. Hence the total demand equals the total supply. The gold price balances the total demand and the total supply including the amount that will be not offered. There is no need for an annual supply that is equal to the annual demand. When one person sells gold and another person buys gold this only changes the private stocks of gold while the total stock of gold stays the same. So this so-called deficit could exist without any effect on the price.

The price could stay the same simply because some investors wants to store value while some others want to invest in something else. Apparently there is no supply shortage of gold, so what drives the gold price? Since gold is a good its price depends on the quantity of money in the economy. An increase in the money stock increases the goldprice accordingly. The author Jack D. Schwager once wrote “There is never any shortage of gold. So gold’s value is entirely dependent on psychology or those fundamentals that

drive psychology.” This statement is justified in light of the facts that annual gold production is only a tiny part of the total gold supply and the possibility that an annual deficit has no influence on the price. It is partly psychological factors such as mistrust towards fiat money like the US dollar that cause fluctuations in the price of gold. Gold is an alternative currency and therefore its price depends on the acceptance of paper money. With decreasing acceptance of paper money gold becomes more important. A negative outlook for paper money drives the gold price up.

texttim martens--------------------------imageistockphoto,Pickaxe designed by luke anthony Firth from the noun Project

tim martens is 23 years old and a master student in Economics.

GoldEn Bulls and dEFiCits

the best estimates available suggest that the total volume of gold ever mined up to the end of 2011 was approximately

171,300tonnes, of which around 59% has been mined since 1950.

---------------------------tHE PriCE oF Gold BalanCEs tHE total dEmand and suPPlY inCludinG tHE amount tHat Will not BE oFFErEd

sEFa FRONT

mEssaGE From sEBastiaandear rostra reader,

the second semester just started and this means that some very interesting activities are coming up. For example, from the 4th until the 7th of march, the amsterdamse Carrière dagen will take place at the WtC. Further in this rostra Economica, you will read more about this event and the opportunities it offers you.

However, we are not only busy with organizing the aCd. With room for discussion, we can look back on a very interesting session with the indian entrepreneur and philanthropist ratan tata. the weekly sessions in the E-hall are very interesting for you as a student since they are bridging the gap between your lectures and the (economic) actuality. We will receive

the dutch minister of finance, Jeroen dijsselbloem on our chesterfields the 7th of march, and this session promises to be a very special one.

For my fellow board members and me, leading one of the largest study associations in the netherlands has thus far been an incredible experience. as a board member, we are not only busy with supervising our committees. Being a board member also means taking care for the daily routine of the association and working on the long-term strategy of our association. to read more about an average day of one of the board members, see the article about our commercial officer on the next page.

as the board of sefa, we always have to keep in mind the long run.

With the second semester, the search for a new board has also started. although it feels strange to look for successors when there are so many things left we want to realize this year, it is part of the job. there are many new challenges waiting for the new board. if you feel ready for the ultimate step in your student life, you can apply through [email protected].

For now, make sure you don’t miss the opportunities sefa offers to you. We hope to see you at one of our events!

With kind regards,on behalf of the 91th sefa board,

sebastiaan KleinChairman sefa board 2012-2013

--------------------------------------------------------------------------------------------------------------------------------24 rostraEConomiCa sefa front--------------------------------------------------------------------------------------------------------------------------------


--------------------------------------------------------------------------------------------------------------------------------

My name is aniel Ganga. as the commercial officer, i am responsible for the commercial relations of sefa. What does this mean in practice?

Being responsible for the commercial relations of sefa means that i am in contact with over 100 companies every day. during visits to these companies, i try to initiate a partnership for either one of our events or for promotional goals. in practice, this means that many hours are spend in one of the skyscrapers at amsterdam-zuid/WtC. as commercial officer, i am not only focusing on our existing partners, but i am also continuously looking for new partners. Besides this, i am responsible for the acquisition process within our committees. on this page, you can see how an average day of my board year looks like.

in general, a board year gives you the chance to develop yourself so that you have a perfect position when entering the job market. learning how to work efficient in a team, coming up with solutions for upcoming challenges and expanding your professional network definitely will give you a lead in finding your dream job!

the board consists of seven positions, all of which are very challenging in their own manner. Go to www.sefa.nl to learn more about the available positions.

a daY in tHE Board oF sEFa

tHE aGENDa

oF aN avEraGE

Day oF tHE

CoMMErCiaL

oFFiCEr

9.00 – 11.00: visit a large multinational for main sponsorship

11.00 – 12.00: meeting with the treasurer to discuss revenues

12.00 – 13.00: lunch13.00 – 15.00: meeting with the amster-

damse Carrière dagen committee

15.00 – 17.00: visit a new company to start cooperation

17.00 – 19.00: updating the internship & vacancy database

19.00 – 21.00: dinner with my colleagues from the Big Five study associations

--------------------------------------------------------------------------------------------------------------------------------26 rostraEConomiCa the value of value--------------------------------------------------------------------------------------------------------------------------------

While Oscar Wilde wrote these words over a century ago, he could not have envisioned they would still ring true, perhaps even more true, over a century later. Nowadays in the 21st century, we update every second the exact price of publicly listed companies, commodities and other securities. Thanks to incentive systems employees’ earnings are related to the financial results of their actions. And even in your beloved Rostra Economica, most articles concern prices and currency over value.

GDPIn particular, the political debate is centered around money. For example, the calculations of political party programs by the CPB (Bureau for Economic Policy Analysis) are an important feature in the election contest. And when a coalition agreement is reached, the economists of the CPB evaluate it before it is send to the chosen representatives. In addition, we compare ourselves to other countries mostly in terms of Gross Domestic Product (GDP) per capita.

However, why do we attach so much meaning to the GDP-value? Why is it that we use aggregated income to measure the performance of a state? The story of the maid and the professor provides a classic counterexample. An unmarried

PriCE or valuE?------------------------------------------“noWadaYs PEoPlE KnoW tHE PriCE oF EvErYtHinG and tHE valuE oF notHinG.”- oscar Wilde, in “the Picture of dorian Grey” (1890)

textCorneel den Hartogh--------------------------photoistockphoto,def.

Corneel den Hartogh is 22 years old and master student Philosophy of social sciences.


--------------------------------------------------------------------------------------------------------------------------------

professor hired a maid to do his housekeeping, aggregated income rose. Sooner rather than later, a romance emerged and after a year the couple married. The maid moved in and kept doing the housekeeping. Hence, the only thing that changed was the happiness of both, which increased greatly! However, GDP declined since the professor did not pay his wife a salary, but just shared his income with her.

The lesson of this tale is that the well being of a person nor a nation can be straightforward derived from GDP. Besides this, there are more problems for the GDP. Since the goal of government is not limited to increasing

happiness. We expect from the government to sustain and increase the quality of life. This seems even more difficult to derive from the measurement of GDP.

FreedomsNobel Prize-winner Amartya Sen has developed a different approach to evaluate the standings of individuals (and secondarily countries). He argues in his book ‘Development as Freedom’ that the freedoms that someone has are more important than their income. Hence, governments should try to enhance the capabilities of their citizens. Sen discusses several ‘freedoms’ (political freedom, economic facilities, social opportunities, transparency guarantees and protective security). According to Sen, we often don’t have to choose between these freedoms since they are supporting each other. For instance, transparency guarantees about government behaviour will make it less risky to invest money and thus improves economic facilities. Likewise, an improvement in the education system (a social opportunity) will make a country more attractive for foreign investment.

Income nor freedom: Buddhist monks beg for food every morning, while they focus on reaching internal happiness

------------------------------------------tHE CPB EvaluatEs a Coalition aGrEEmEnt BEForE CHosEn rEPrEsEntativEs

Since the measurement of freedoms is not as straightforward as income, Sen admits that a discussion is necessary to arrive at some form of consensus. However, he notes that the difficulty of measurement lies in the complexity of the subject (quality of life). Although it is easier to measure GDP, this does not mean that measuring GDP really helps to measure the quality of life. It is important to note that quality of life, which is used by Sen to measure capabilities, is an aggregate of actual outcomes. Sen justifies this choice with his assumption that individuals choose rational. Hence, their actual outcomes are the best they could make of their capabilities.

An example of a debate that would suit Sen’s approach is the debate about ‘Obamacare’ in the United States. An argument in favour of ‘Obamacare’ is that people have the right to healthcare (a social opportunity), while opponents argue that the obligation to buy healthcare limits freedom (economic facilities). This is the kind of debate that Sen wants to see in society; what policies increase overall freedom? Which freedoms need the most attention at the moment? According to Sen, we should talk less about (aggregated) income and more about the possibilities it gives us. When a rise in aggregated income is combined with a decline of other freedoms, we ought not to be happy.

Nominal GDP in billions of Us$ 10,000+ 5,000 - 10,000 2,000 - 5,000 1,000 - 2,000 500 - 1,000 200 - 500 100 - 200 50 - 100 20 - 50 10 - 20 0 - 10

------------------------------------------tHE dEBatE aBout GovErnmEnt aCtion is CEntrEd on monEY



--------------------------------------------------------------------------------------------------------------------------------

The ‘Good Life’However, besides the difficulty in measurement there seem to be more fundamental problems with the thesis of Sen. Critics point out that Sen’s approach of individual capabilities does not include the fact that people live in communities. This ‘living together’ has nothing to do with freedom, but is intrinsic part of human life. In his dismissal of income as main focus, he has implicitly introduced his own idea of the ‘good life’; individuals rationally maximizing their freedom. However, what about Buddhists that are trying to reach internal peace? They are not interested in much of the freedoms of Sen.

Hence, just as GDP-adepts imply that earning more income is always better, Sen implies that more freedom is always better. In the words of French economist and philosopher Marc Fleurbaey: “The question of the ‘good life’ is one which philosophers and economists alike make great efforts to shun, but it always seems to lurk in the background.”

Since the question of the good life is always there anyway, I suggest we take it to the front. Why don't we use the ability to live the 'good life' (how one thinks (s)he should live), as measurement for individuals and states? Let me

amartya sen, winner of the nobel Prize for Economics in

1998.

be clear; this does not mean income and freedom are of no importance. An important reason to value freedom is that it is necessary for the good life. If you cannot make your own decisions, you cannot behave intentionally good or bad. And as noted earlier, income could enhance certain freedoms. Critics could argue that measuring this ability is nearly impossible. But is that really a problem? As Sen noticed; the difficulty of measurement is inherent in the difficulty of the subject. A more fundamental question would be: What does a good life consist of? What behaviour is good and which is isn’t? How can one develop a society where it becomes more easy to do the ‘right thing’? The debate between ethical traditions about right and wrong would not cease, but that isn't necessary since our focus is foremost on actual behaviour. Philosophers agree that contradicting traditions often result in the same actions in the real world. Besides, a bit more attention for ethical theory in public discourse sound welcome to me.

With this ‘good life ability’, we can discuss how government could help people to behave better, instead of a GPD-oriented focus. Institutional structures can be arranged in order to make this easier. Instead of just ranking countries on income or freedom scores, we could compare them on their ideas and outcomes regarding the good life. Of course, there will be disagreement between cultures about the content of the good life. Right and wrong are different in different parts of the world. And Since there is no objective measure this comparison would not lead to a ranking. However, I think it would lead to valuable insights. Individuals, for example, could see more easily which countries support their idea of the good life the best.

ConclusionThe value of GDP in the public debate is overrated. Money is no measurement for happiness and certainly not for the quality of life. While Sen’s capabilies-approach is a step in right direction, it still implies a paternalistic view about what we should value. Therefore, I suggest a focus on the ability to live the ‘good life’. We should make the question of the good life the focus of public debate. What should we value? And, after that; How do we enhance and measure the behaviour we value? This debate and the measurement of its success will be difficult. In addition, I admit that we could forget the prices of some things in the process. But, we will have a better chance to understand what is valuable in the world around us. And isn’t that what we are really after?

--------------------------------------------tHE diFFiCultY oF mEasurEmEnt liEs in tHE ComPlExitY oF tHE suBJECt


W hen I was a student in Rotterdam, the insurance company next to our

apartments carried a subtle indirect neon advertisement on its roof: Everything valuable is vulnerable, Alles van waarde is weerloos in Dutch. It’s a beautiful line from one of our most exuberant and idiosyncratic poets, Lucebert. I did not like it. Poetry, beauty for its own sake, should not be used for commercial exploitation. I am still equally disturbed if a Beethoven or Mozart tune is used as a jingle to back up an order to buy something which I did not know I desired. I feel fooled, trapped, when I joyfully recognize the beauty of a phrase or a melody and then discover it’s not about sharing beauty but making a profit. Sure, self-interest reigns, it’s Adam Smith’s invisible hand, but I do not like the dishonesty. Worse, they spoil my pleasure: if they successfully catch me often enough, I think of toilet paper whenever I hear that magic melody by Mendelssohn.

Not wanting materialistic desires to be glued to artistic beauty is one thing, it‘s one step further to require the artist to follow nothing but artistic, pure impulses, express her emotions and perceptions with no other motive than to follow her own inner voice. I think that this is an overly romantic view. We are clearly not prepared to support each and every artist to do so. Making a

living as an artist is then sheer coincidence. Would be nice if Say’s Law would hold for artists: every supply creates its own demand. As long as that is not the case, the artist cannot but help the market a little. Indeed, by sales promotion, in whatever way. “I want to be read”, wrote Multatuli, a nineteenth century Dutch author who exposed colonial exploitation in Dutch East India (now Indonesia). “I have a shop”, exclaimed Reve, a recently deceased novelist, when he seized the opportunity in a television show; it was considered hilarious in those innocent early days when television shows had not yet been drenched in hidden commercial exploitation.

---------------------------i tHinK oF toilEt PaPEr WHEnEvEr i HEar tHat maGiC mElodY BY mEndElssoHn

Perhaps, requiring an artist to express only his own perceptions, without trying to cater to a market demand, boils down to snobbism. For good reasons, one may evaluate a work of art only by what it is, not by the artist’s intentions. The work may be appreciated by a few “connoisseurs” or appreciated by the masses and rejected by the connoisseurs because it just

reflects the popular taste, presents no challenge, moves no boundary. But that’s just a case of product heterogeneity.

I suppose that most art actually started out as work that was deliberately made to please the patron. Ancient Greek poets recited their verse to entertain an audience. Architects built palaces designed to live comfortably and to impress peoples and princes. Haydn wrote his symphonies to entertain his patron Prince Esterhazy. “Make sure that your audience will never be bored”, wrote Giuseppe Verdi in one of his letters. When he died, 100,000 Italians wept behind his coffin. Michelangelo painted and sculptured to please the pope. Creative artists have their strong convictions about how and what to create, they may have intense conflicts with their patrons, but in the end they know they have to convince the clients of the value of their perceptions.

For an economist, the romantic view of the artist is an inversion of welfare theory. The market is heralded as the institution that serves the consumer by delivering precisely what she wants. The romantic view of the artist would claim that true art is to be developed with disregard, if not disdain, for the taste of the patron. I am much happier with the view of product heterogeneity.

Dr Joop Hartog

EvErYtHinG valuaBlE is vulnEraBlE

tekstdr Joop Hartog

Emeritus Professor of Economics amsterdam school of Economicsuniversity of amsterdam Fellow of tinbergen institute, iza, aias, CEsifo, CrEammember KnaW royal dutch academy of sciences.

--------------------------------------------------------------------------------------------------------------------------------column < the value of value rostraEConomiCa 31

--------------------------------------------------------------------------------------------------------------------------------


In only a few more weeks, the Amsterdamse Carrière Dagen 2013 will take place. As the committee, we are really looking forward to these four days! After last February, when we heard that we would be responsible for the 2013 edition, we have been preparing for this on a daily basis. Hereby we would like to give you a glimpse behind the scenes.

BaCKstaGE at tHE aCd CommittEE

Marinka: As the treasurer, my tasks are very diverse. In the first couple of months the biggest ‘projects’ consist of the composition of the budget and finding a proper location. As soon as the acquisition period started, the focus shifted towards the contracts the companies have to sign for participation. After that, invoicing becomes an important aspect. After the acquisition deadline the four-day program has to be composed. I am also responsible for furnishing the location.

Laura: As the secretary, I have a diverse role within the committee. It is my task to record the weekly meetings in the best way possible, so everybody can afterwards read what has been discussed. Additionally, I am responsible for the website. I make sure that it stays up-to-date and looks nice. I am also the coordinator of the promotion. Together with two other women, our team prepares the promotion of the event as good as possible.

Femke: As the coordinator of the acquisition team I am responsible for the planning and implementation of the acquisition activities. After composing all of the necessary acquisition documents, the acquisition team started calling the companies. All the time and effort are eventually worth it when the first companies agree to participate. It is my task to monitor this process. Spamming my team members with files, overviews and schedules, I love it! It is quite special that I did not drive them completely crazy.

if you like to keep reading our experiences, take a look at our blog! acd2013.blogspot.nl


--------------------------------------------------------------------------------------------------------------------------------

Tijmen: As you can see, the committee consists of nine women and just one other guy. You can imagine what that must be like… Leading a weekly meeting at nine in the morning is a nightmare and my phone bill is skyrocketing. Despite the fact that a year like this takes a lot of time and investment, I would not hesitate to do it all over again. It is incredibly cool to organize an event such as the ACD with a group of enthusiastic and ambitious fellow students. It is amazing how open and constructively critical everybody is towards each other in evaluation sessions and how positive the attitudes are towards each other; even during the stressful moments. If we can keep up this positive atmosphere and commitment for the upcoming three months, the ACD will become THE greatest career event of the year that you simply can not miss!!

Ralph, Heleen, Michèle, Loes, Suzanne: As the members of the acquisition team we have one main task, which is acquiring the companies. This may sound a little monotonous, but the good part is, that because you are constantly doing the same thing for a long period of time, you can improve your skills. You get in touch with a lot of different people working at these companies, which makes the job very interesting. It is also a lot of fun to see the energy you put into the project being rewarded with such concrete results. Every new company that we acquire feels like a new achievement.

Lesley: As I am responsible for the general promotion I have many different tasks. I have so many, I dream about it! During the first few months we have mainly been brainstorming a lot about, for example, an exam-stunt, promotion material, and making a promotional video. In order to realize these plans, a lot of calls and e-mails have been made to figure out the possibilities. Right now I am mainly focusing on finishing what I started.

the aCd is one of the biggest career events of amsterdam. this year the eighteenth edition takes place from the 4th until the 7th of march in the World trade Center, amsterdam. students in the last phase of their study or at the start of their career,

have the ability to get to know numerous interesting companies. next to company presentations, cases and individual conversations with companies, the aCd offers a lot of informative and interactive

workshops and trainings in which you can distinguish yourself from other students. it is also possible to get to know even more about the companies through having break-fast, lunch or dinner with them!

Malou: Designing the company profile book is a tough process and also designing a poster and flyer is an interesting job in itself. You make a design, or ten, look at it again and all of a sudden you hate it. You make a couple more, throw some out, show some to the committee and after the meeting you can start all over again. But in the end, when you can hold on to the final version, it is all worth it.

--------------------------------------------------------------------------------------------------------------------------------bookreview rostraEConomiCa 35

--------------------------------------------------------------------------------------------------------------------------------

a nybody who is interested in financial markets probably knows the Market Wizards

Series. Next to Reminiscences of a stock operator by Edwin Lefevre, the book belongs to the classics in stock market literature. After Market Wizards, the new Market Wizards and Stock Market Wizards, Jack Schwager continues his series with Hedge Fund Market Wizards.

The newest part of the series gives an impression of the hedge fund industry on Wallstreet and in the City of London. The book is a collection of interviews with 15 remarkably successful hedge fund traders separated into three categories: Macro Men, Multistrategy Players and Equity Traders. The book offers a short portrait of the traders, their first engagements in the market and their development over time. On the one hand, Schwager searched for traders that showed an exceptional return to risk relation; on the other hand, he searched for interview partners that provided enough information for the reader.

One of the traders that is being interviewed is Jaffray Woodriff. Most traders look for trends to follow or trends that are going to change but

Woodriff uses a different approach. He belongs to the Macro Men who try to find patterns that suggest greater probabilities for higher or lower prices. From 2003 to 2011, his fund achieved an annual compounded return of 12.5%. This is the evidence that it is possible to perform very well in a system that neither follows a trend nor seeks counter trends.

Another remarkable trader is Edward Thorp, who created the first black-jack betting strategy that resulted in the bestselling book Beat the Dealer in 1967. Thorp developed a formula to value options before the Black Scholes formula was developed. In addition to that he established the first successful quantitative hedge fund. In 1994, Thorp started a second hedge fund named Ridgeline Partners. Within ten years he achieved an average annual volatility of only 7 per cent and an average annual compounded return of 21 per cent.

In the course of the interviews, Schwager uses the financial crisis in 2008 as a reference point for the reader. This helps the reader follow the text and offers insights into a trader’s mindset. In comparison to Market Wizards, Schwager is more confident and precise in his interview style. His

opinion about the markets is stronger than before, which the reader realizes when Schwager confronts the trader with his opinions about the markets. Hedge Fund Market Wizards is more technical, which influences the readability. Nevertheless, Schwager balances this with numerous explanations and an appendix.

----------------------------intErEstinG For PEoPlE tHat tradE But also For PEoPlE tHat arE simPlY intErEstEd in tHE FinanCial marKEts

The book ends with 40 Market Wizard Lessons, which consist of the bottom lines of the chapters. A unique characteristic is that the lessons deal with trading but also with life in general. This philosophical approach makes the book interesting for people that trade but also for people that are simply interested in the financial markets. In particular, anybody who is interested in the stock market and psychology or is considering to work in the City should read this book.

texttim martens

tim martens is 23 years old and a master student in Economics.

suCCEssFul tradErs adaPt

Hedge Fund Market Wizardsauthor: Jack d. schwagernumber of pages: 526Year of first publication: 2012Publisher: Willey

aCtualitY rEadaBilitY ContEnt


i f you want to read something about the Dutch economy, just about any newspaper will suffice.

Forecasts on Gross Domestic Product (GDP), unemployment and opportunities on the labor market will however, probably not make your day. Most students are working hard to get high grades, increase their knowledge and find an appropriate job quickly after graduating. These days unfortunately, this does not seem very likely anymore. It takes more time to find a job after graduating, graduates get paid less and sometimes have to accept jobs that are below their education level. In better economic times, it was quite clear that higher education pays. What is the value of education in times of recession?

The reason why we even try to get a University degreeThere are many reasons why we go to class at nine in the morning, while we would also have the possibility of staying in bed or doing other things. Of course, we are required to go to school until we reach the age of eighteen, but also afterwards, we are still motivated for several reasons to

go to college. We receive financial aid from the government, we can travel for free with the public transport and can borrow money under favourable conditions. This all makes it possible to study without many financial limitations. Because of the fact that this degree is too difficult to obtain for others, education is organized in such a way that only the highly skilled students can obtain these qualifications. This also makes it easier for employers to distinguish the low skilled workers from the high skilled workers. However, this is definitely not the first reason why students go to University. In many first-world countries, including the Netherlands, for many students it is just the way the cookie crumbles. As a four year old child you leave the safe environment of the living room for a uncomfortable class room, not realizing that the ‘classroom’ is the place where you will probably spend most of your time for the upcoming twenty years. In the Netherlands, almost 33% of the people between 25 and 65 year are highly educated and have completed at least a HBO or University degree. On the other hand, 11% of the people

tHE valuE oF our KnoWlEdGE

between 18-24 year leave school without any degree. However, this is still ahead of European average. In Spain, for example, this number lies around the 31%. A recently published study of Nibud shows that 38% of all students in higher education have a student loan at the DUO, and have a debt of €10.644 on average. From this we can make a prudent conclusion that these students expect to earn this debt back in the near future.

Determination of the value of educationThe big question is however, how does the value of education respond to changes in the macroeconomic conditions of a country? The value of education depends on different variables: the intrinsic quality of the education, the possibilities on the job market and the expected future earnings. If there are no jobs in your field of education, your degree is probably worth less than a degree in a field in which employers are begging for new employees. The knowledge centre ECABO did a recent study on opportunities on the labor market and found that there will be an increasing

textmaaike Boot--------------------------photothijs de Boer

maaike Boot is 21 years old and a third year economics student.


--------------------------------------------------------------------------------------------------------------------------------

number of jobs in the financial-administrative branch. However, here there comes an important trade off into view, doing something that you like and doing something that gives you the best job expectations for the future. It is not only the expected future job possibilities and earnings that determines the value of your education, but it also depends on the school you’re going, the teachers which correct your work and give you grades. Off course, you’re not only going to college to get a degree, but also to learn theories, socialize and learn to work in a team.

Recession and educationAs mentioned before, these days there are little financial limitations that can withhold people from going to college in the Netherlands. In the recent debt crisis and with the strict budget deficit restrictions of the European Union, the newly settled government has almost no other choice than cutting their budget. Unfortunately, education is not saved this time and certain things about education financing will disappear. Students will have to take out a loan to pay their years of education and will probably start their job career with a debt. Following a second study after finishing the first is costly, with a tuition fee of thousands of euros a year. However, students must be sure about their future earnings to be willing to take out a

loan for their education. From a rational economic view, if the difference between the expected earnings of a job without any education and the expected earnings of job with education is not high enough to repay the debt, education is useless.

---------------------------ForECasts on GdP, unEmPloYmEnt and JoB FindinG Will HoWEvEr, not rEallY maKE Your daY

Recession and the labor marketA recession does not only influence the financial circumstances of going to college, but also influences the circumstances on the labor market. Statistics Netherlands, the CBS, recently published some new data on the expectations of the change in GDP for the upcoming year. The GDP will shrink in 2013,which means that firms will probably hire less employers until they see their productivity rise again. Unemployment rates increase and people have to search longer for a job that suits with their education level and people are sometimes forced to take jobs that are lower than their level

of education. People with a University degree settle for a job at HBO level, and HBO graduates take also more jobs on a lower level. From this point of view, it seems most likely that the low-skilled workers are mostly hit by the recession. The high skilled workers should be content with a ‘lower’ job and probably less salary, but will still be able to find a job.

Recession as a challengeIn the future, it’s certain that there are definitely going to be some changes in regard to the Dutch education. But as with almost any change, a change doesn’t always have to be negative, or you can at least make it a little more positive by seeing the change as a new challenge. On the one hand, the fact that there are probably less students who will start their career without any debt, will definitely force more students to finish their studies within the given time. On the other hand, students will need to recover the loss of the study financing, and when they don’t want to borrow, they will need a part time job to earn some money. The uncertainty on the job market will probably have a positive impact on the curriculum vitae of students, because a degree alone is no guarantee, or at least less guaranteed then in times of an economic boom, for a job anymore and students will need to find other things that can distinguish themselves.

38% of all students in higher education have a student loan at the duo, and have a debt of €10.644 on average.


Though people might say money can’t buy you love, it seems that you can put a price tag on everything in reality. For centuries, money has been used to value items. Whether you’re talking about stocks, real estate or bread; everything has its value, expressed in money.

Fundamental valueValue might be expressed in money, but what it represents is the sum of certain factors. For example, the value of a stock consists of the sum of total discounted payments and

WHat arE PriCE BBuBBBBlEs?

textPierre Borst--------------------------photosColin robertson

Pierre Borst is 21 years old and a Bachelor student in Economics.

Price bubbles are a well-known phenomenon. the crisis that we are currently experiencing started with the burst of the housing bubble on the american real estate market, and in 2000 we experienced a small crisis as a result of the burst of the so-called ‘internet bubble’. one of the most extreme examples of a so called price bubble is the tulip mania that became a hype in the dutch republic, during the Golden age. at its peak, just before the market collapsed, tulips were sold for the price of mansions. How do these price bubbles arise and under which circumstances could they remain intact?


--------------------------------------------------------------------------------------------------------------------------------

the expected final value when it is sold in the future. This is called the fundamental value. To determine this fundamental value, three estimations need to be made: the total value of future dividends, the final value, and the discount factor against which the future profits are calculated. However, because no one can predict the future, a lot of these estimations seem to be incorrect afterwards.

SpeculatingAs a result of all of these uncertainties about the future, one can argue this fundamental value of financial assets is difficult to justify. Dividends will not be paid out when the company doesn’t make a profit. As a result of not paying dividends, the final value of these stocks will also drop. On the other hand, assets may be valuable only due to the fact that investors expect them to be worth even more tomorrow. By speculating on this future value, which thus exceeds the fundamental value, investors create a bubble. In the extreme case, a hype occurs in which investors only buy assets for the sole purpose of reselling it to the next investor. At this point, the fundamental value is only a fraction of the value at which the asset is trading. The investment has changed into a Russian roulette game, but as soon as someone pulls the trigger

everybody loses. All of a sudden, the bubble bursts and its value, created by speculators, evaporates.

Recent bubblesThis pattern is recognizable in all infamous bubbles, including those mentioned in the introduction. Until 2008, mortgages in the US were provided to people who couldn’t actually afford them. Banks secured themselves against the risk of default by using the houses as collateral. This was possible because the price of houses had been

--------------------------------------------tHE invEstmEnt Has CHanGEd into a musiCal CHairs GamE WitH ovErlY ExCitEd PartiCiPants, in WHiCH EvErYonE maKEs a ProFit as lonG as tHE musiC is PlaYinG and tHE tradinG GoEs on

increasing for several years and increased even more as it became easier for people to finance a house. But all of a sudden, a lot of debtors could not pay their mortgage anymore and lost their homes. Because all of these houses were being sold at the same time, the price of houses began to drop, causing more people to lose their homes because their mortgage construction required a continuous rise of house prices. This created a snowball effect, which burst the housing bubble and resulted in the crisis we are currently experiencing.

By the end of the nineties, when the internet bubble came into existence, investors thought that standard economic laws didn’t apply anymore. In their euphoria amid the growing .com companies, they set aside traditional corporate structures, such as profit, loss, turnover and capital, and were only interested in the market shares of the companies.

Are bubbles rational?Though it seems that bubbles are the result of over-enthusiasm, naivety and a certain degree of risk seeking behavior, investors seem to be making rational decisions by spurring on these bubbles. That means, as long as there are other people willing to invest, the bubble remains intact. You just need to make sure that you are not involved in the bubble anymore when it bursts.

An important condition for the existence of a bubble is that investors do not know when it will burst. If every investor knows the bubble will burst in five months, they will all get rid of their investment just before, say, in four months. Because every investor now knows that everyone will discard the investment in four months, they will try to get ahead of the others by discarding their investment even earlier. Following this reasoning, once a certain ‘bursting date’ of a bubble becomes known, the bubble will burst at the exact moment the news spreads.

As long as the end is not known, a bubble can be inflated for months or even years. But all of a sudden, panic may strike and investors will try to make their way out as fast as possible, thus bursting the bubble.

-------------------------------------------BY tHE End oF tHE ninEtiEs, WHEn tHE intErnEt BuBBlE CamE into ExistEnCE, invEstors tHouGHt tHat standard EConomiC laWs didn’t aPPlY anYmorE


--------------------------------------------------------------------------------------------------------------------------------FEB student abroad rostraEConomiCa 41

--------------------------------------------------------------------------------------------------------------------------------

E very issue of the Rostra we let a FEB-student describe his or her experience studying abroad at a

partner university. This time: Sofie Kleefstra about studying in Bangkok.

This will be a once-in-a-lifetime experience, something you will never forget, a few months of studying, partying and travelling; those are just a few things people say about what an exchange is going to be like and I can tell you, all of it is true. From all the places and universities I could choose from, I opted for Bangkok because I thought this destination could give me the best combination of all these things. Thailand is so different from our organized and sophisticated European cities, and the contrast makes staying here very exciting.

My first impression of the city was that it was quite chaotic with all the traffic, including buses, taxis, motorbikes, tuk-tuks, bikes and anything you can put wheels under. However, the nice and friendly people make up for that. I think the chaos is something you have to get used to and once you open your eyes to other things, the city becomes nicer. I have really started to like Thailand a lot: the tasty food, the friendly people, the colors, the warm climate, the nature

and being able to do so many things because it is relatively cheap to do so.

The place I have been staying at was wonderful. It had a pool, a gym, a restaurant and 100 other students that lived there. Every evening we would go out for dinner, which only costs around 2-5 euro. (Cooking yourself is actually much more expensive.) After dinner there is always the possibility to go out and the nightlife in Bangkok is an experience in itself: everybody is dressed up, all girls in high heels and short dresses, ‘lady boys’ eying the tall blond guys we brought, and many more interesting people to meet. There are a lot of clubs and you can continue till late in the morning and this is possible every single night of the week. Of course this is not the only thing you do when on exchange; you also have to go to university. University is like high school here. When I arrived at the Chulalongkorn University every morning, they were playing boy band music, guys were playing games and girls were giggling and running around. We were also all in school uniforms, which made it feel even more like high school. The classes were small and personal which I really appreciated, the professors tried to get to know you and the Thai classmates always tried to help us with things. I

liked the classes I had chosen, some were only available here, such as ‘Buddhist and sufficiency economics. Here, you first learnt the principles of Buddhism (about 95% of the Thai population is Buddhist) and then it was applied to economics. I was able to understand the Thai people better by following this course and it gave an interesting perspective on their economy.

---------------------------CooKinG YoursElF is aCtuallY muCH morE ExPEnsivE HErE

My exchange has come to an end now, I just finished my last exams and now I am getting ready for 1,5 months of travelling. I really had a great time in Bangkok! I have met really nice people, travelled and learnt a lot. I can only advise everybody to take opportunities like this when they cross your path!

textsofie Kleefstra--------------------------photosofie Kleefstra

sofie Kleefstra is a third year student studying Business.

FEB aBroad: a sEmEstEr at CHulalonGKorn univErsitY

Curious about your opportunities to go abroad? visit www.student.uva.nl/eco

--------------------------------------------------------------------------------------------------------------------------------42 rostraEConomiCa Fsr page--------------------------------------------------------------------------------------------------------------------------------

WorK in ProGrEss WHat WE’vE donE so Far

F or a good start of the new year, we would like to look back on the main projects we have been working on until December 2012. We started with

great enthusiasm and new ideas to improve your FEB experience and we look forward on building upon and improving the things we have achieved in the first semester. So here’s a short recap.

Study weekTowards the end of the school year 2011-2012 the FSR found out that the study week in week 7 would be cancelled and moved to week 4 (the week of the midterms). This decision has not been communicated to either the council or the students. Together with the FSR from that year, we decided that the process of cancelling the study week was not conform the rules. In important decisions concerning the studies at the FEB, we either have advice or consent (veto) right. Due to the way the decision was conducted and implemented, we decided to make a “geschil”, which is similar to a lawsuit at a special commission responsible for university laws.

During the first weeks of this semester, we wrote a letter together with our legal consultant to this commission stating our points and providing them with the documents proving the process (the letter is 9 pages and the attachments more than 1000 pages, to give an idea of the dimensions). The dean then had 6 weeks to react on our letter.

Now, the commission is investigating the two letters and attachments, which will take some time. If things are still unclear for the commission they can request a hearing where both parties (board and FSR) must answer the questions from the commission and further outline their statements.

Thus, we are now waiting for the next step. More info will hopefully follow soon!

Student’s rightsThe Faculty Student Council found out that a lot of students often do not know their rights. Even teachers are sometimes not aware of the rules as stated in the Teaching and Examinations Regulations (Dutch: OER- Onderwijs- en Examen Reglement). We received many complaints and also had informal talks with students during which we discovered many discrepancies and misleading information concerning this matter.

Therefore, we made a summary of the most important rights and rules in this document. So far, it is only the summary of the Rules applying for Bachelor students, a version for Master students will follow. During the last OV (meeting with the board of the faculty) we received the confirmation of the board that the rules as stated in the OER are binding and thus complaints concerning this are being treated seriously and will be resolved instantly.

Where can you get this summary? Look at our OER-summery poster next to room E0.06 or check our website!http://studentenraad.nl/feb/what-we-do/information-for-students/information-for-students/

Taped LecturesAn agreement between the board and FSR from 2011 states: the FSR and the Dean agreed upon the following condition regarding taped lectures: ‘all first year’s courses of the bachelor program Economie en Bedrijfskunde are either taped or provide slidecasts (or equivalent digital alternatives)’.

Unfortunately, we discovered that the measures have not fully been implemented as stated in the agreement. Due to concerns of teachers and other faculty staff, we decided to improve the implementation of videotaped lectures that can aid the understanding of complex topics to students.


--------------------------------------------------------------------------------------------------------------------------------

To find an appropriate alternative, we spoke to both the OC (“study commission”) and the OR (workers council) to discover the problems experienced so far. As a result of this discussion, we came up with three alternative measures:1. Videotaped lectures.2. The use of online third-party lectures.3. Slide Casts (10 minute standalone videos where the teacher explains a concept using slides).

The idea of these three options is that teachers can choose the one that best fits their course and material. Regardless of which method is chosen, the main goal is always to help students to get a better understanding of the more complex material.

During the last OV the board was very positive about this ideas and wants to implement it with us next year.

ComplaintsOne of our responsibilities is also to help students with problems they face during certain processes or courses of their studies. We received many really good complaints which helped us getting a better view of what is going on (and wrong) at our faculty. These included for example the work of study advisors, the functioning of SIS, the printing of diplomas as well as specific courses.

Some of the complaints can be resolved quickly by talking to the person responsible at the FEB. For others, like for example complaints about specific courses, we contacted the professors and the board to discuss the problem and together find a way to solve them. In this context we would also like to outline the importance to fill in the course evaluations after the exams as they will be discussed after every period!

We would further encourage you to share your ideas and complaints with us. The best way to do this is to come by

our office or write an email. For short questions and remarks you can also use our Facebook page.

ExcellenceThis year we are starting with a new project called ‘excellence’. The focus of this project is to find out what the FEB does on this matter and how we can help them improve excellence. For example, how can we motivate excellent students to perform even better or help average students strengthen their academic skills.

For this project we would appreciate your input. Do you have a vision on excellence or do you know what other universities do for excellence, contact us!

CoNtaCt DEtaiLs

open office hours E2.09: tuesday, Wednesday and thursday 11:30 – 12:30

tel. 020 - 525 4384

For questions, complaints and feedback you can reach us by sending an email to: [email protected]

For regular updates and information join our Facebook-group: facebook.com/groups/fsrfeb

www.studentenraad.nl/feb

HoPEFullY WE HavE GivEn You a Good insiGHt on WHat tHE Fsr is doinG. at last, maKE surE Your Good intEntions Will ComE out tHis YEar!

--------------------------------------------------------------------------------------------------------------------------------44 rostraEConomiCa Economics from the outside--------------------------------------------------------------------------------------------------------------------------------

i n this new rubric, I will discuss economics from an perspective on the outside of our science. As a first

topic I want to discuss an article on nujij.nl (a popular Dutch news site) or, more precisely, the most popular comment on this website. The article was about Edin Mujagic, lecturer at Tilburg University, who predicted that inflation will rise. The most appreciated response was, roughly translated: “Funny, suddenly all kinds of experts arise, who explain us what apparently they themselves did wrong the past few years. If you work in the financial sector, then in my opinion you are a legalized criminal!”

It is important to notice that this comment was barely a response to the content of the article. It could have been posted underneath any article in which an economist expressed his or her opinion. Secondly, besides an attack on the financial sector, it is an attack on the governmental system. Economists are not simply criminals, but their misdoings are tolerated by the ones who make the rules. Thirdly, it is just not the opinion of one fool, but the most favored comment, while the third-rated comment also mentions legalized theft Although the claim seems outrageous and is stated without any foundation, it is a widely

is tHE FinanCial sECtor lEGalizEd CrimE?

supported attack on the system of the financial sector. Therefore, I think this comment deserves our attention.

Thieves GuildBefore delving into this case, let me first give you a clear, fictional case of legalized crime. In the books of the Discworld series, written by Terry Pratchett, the government has instituted a “Thieves Guild”. Just like guilds in the Middle Ages, this guild is allowed to regulate their businesses and in exchange they have to pay a certain fee to government. You might wonder how such a guild would work in ‘robbery-business’. To make sure people don’t complain that they are robbed to often (and consequently press the political power to take action), the Thieves Guild has made introduced their own regulation. The most important rule about the receipt. Whenever someone gets robbed, he receives a receipt which assures him he won’t be robbed for a certain period. If some other member of the Thieves Guild tries to rob this person the next day, he will immediately have to cease his attempt to robbery when he finds the receipt. When this is not done, the victim can file a complaint to the Guild, which will discipline the delinquent. Hence, robbery has been regulated and, within certain

boundaries, legalized by the sector itself. Nonetheless, it remains theft. In a moral sense, it is still a crime.

Now that we know what legalized crime is, let us try to crack the case. The commenter didn't provide any foundation for her argument, thus we have to look for it ourselves. This is not a problem at all, since it enables us with more space for interpretation. Nonetheless, it's still unlikely that we can find a proper foundation for this argument in our textbooks. These are written by more influential, mainstream economists who won’t scold the system which they have helped to create.

Heterodox EconomicsThus, let's have a look on the outskirts of economic science; the field of so-called heterodox economics. This an umbrella term for Marxist, Post-Keynesian, Institutionalist and Austrian schools of economic thought. While I didn’t seem to find the concept of legalized crime, I did run into some rather fascinating articles (Ever wondered why vagrancy is a crime? Marxist theory provides an interesting explanation! Interested in how economic models can explain the corruption in China? Institutionalists can tell you more about it!).

textCorneel den Hartogh --------------------------imageYvonne roos

Corneel den Hartogh is 22 years old and master student of Philosophy of social sciences.

Luckily enough, Jesús Huerta de Soto did use crime in reference to the financial sector. This professor of Applied Economics in Madrid is a leading scholar of the so-called Austrian School of economic thought. The Austrian School, named after the country where it originated, shuns the use of statistic methods and focuses on individual behaviour. In addition, De Soto holds that fractional banking, an essential feature of the current financial system, is “a mortal sin and a crime of misappropriation” (i.e. the wrongful use of other’s funds in one’s care). This is what we were looking for!

The Legalized CrimeLet’s see how this professor underpins his adamant claim. He starts off by explaining the foundations of commercial banking. Banks are allowed to lend out roughly 10 times more money than they have actually received in deposits. They utilize this opportunity since it enables them to demand interest on money they don’t

have. This not only makes bankers happy, but entrepreneurs as well. Due to this oversupply of money, the bank is willing to invest in even the craziest ideas. However, when the market finds out that the ideas were actually not that good, the bubble will burst resulting in an economic crisis like we see today. Due to the creation of this virtual money that only exists in the accounting books of banks, markets are distorted and hence volatile.

Well, you may argue, maybe the system is flawed, but that does not mean it is a moral sin. A valid point, but De Soto has another argument. Roman Law already forbid to lend out other people’s money and the ones that did, were punished when detected. According to De Soto, fractional-reserve banking, a crime of misappropriation, was legalized in a faulty attempt to stimulate the economy. As we saw in the fictional case of the ‘Thieves Guild’, the fact that something has been legalized does

not mean it has been moralized. It still does not feel right that a ten-fold of people’s savings can be lent out by commercial banks. Although legal, it still seems wrong to many people.

ConclusionWhile our commenter probably did not know anything about Roman Law or the Thieves Guild, (s)he does have a feeling about right and wrong. Not only is this comment very popular, but especially outside of economic circles, De Soto received ardent praise. His major work ‘Money, Credit and Economic Cycles’ has been translated into several languages, including Dutch. For guidance on a credible, morally sound, banking system, De Soto points to the 17th century full-reserve policy of the ‘Amsterdamsche Wisselbank’ (Bank of Amsterdam). Maybe a thorough enquiry into our own history will provide us with some clues on how to draft a banking system, which isn’t just legal, but ethical as well.


--------------------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------------------46 rostraEConomiCa FEB flash--------------------------------------------------------------------------------------------------------------------------------

FEB FLASH

mn sPonsors uva CHair in PEnsion EConomiCs

photomarc Kruse

larGE turnout For room For disCussion WitH RATAN TATAThere was a large public turnout and media presence for Ratan Tata’s appearance in Room for Discussion on 8 January at the UvA’s Faculty of Economics and Business.

The Indian entrepreneur and philanthropist – who rarely grants interviews – answered questions from students and shared his thoughts on business, ethics and the charitable work carried out by his Trust. Following the Room for Discussion, Tata received an honorary doctorate from the University of Amsterdam during the celebration of the Dies Natalis (the University’s anniversary). The entire interview can be viewed on the Room for Discussion site (www.roomfordiscussion.com).

the first edition of the uva Economics and Business teacher’s Congress was a success. approximately 50 secondary school teachers in the fields of economics, business and mathematics attended the congress on saturday, 10 november in the FEB E-building.

Congress participants were able to follow a number of workshops given by FEB researchers and academics. the programme also included a plenary lecture by Prof. arnoud Boot and a special room for discussion session on Economics as a science.

the objective of the congress was to bridge the gap between education practice and science by presenting scientific insights that could be useful to teachers in the classroom.

the FEB intends to organise an Economics and Business teacher’s Congress for 2013 as well.

sECondarY sCHool tEaCHErs introduCEd to tHE FEB

Rostra 293

Documents

Transcript of Rostra 293