Were you intimidated by mathematical formulas in school? Well, here’s a simple economics formula that reveals our future.
If you’re like most people, you grow queasy when economists wax eloquent about what the national or global economy might look like in a few months. The jargon those experts lob around like flying tennis balls at Wimbledon can be intimidating to the economically-uninitiated... meaning most of humanity. Yet economics helps us understand the money-centric world we inhabit; it helps us better perceive the gears and cogs that keep our financial world turning.
Yet it really isn’t everyone’s cup of tea. Maybe that’s why the clever 19th century Scottish philosopher-historian Thomas Carlyle coined the term ‘dismal science’ to refer to economics. Warning: Carlyle was highly intelligent but some of his mid-19th century views offended decent people of his time and would have offended all of us in the 21st century.
Carlyle used ‘dismal science’ in 1849 within his disturbing essay Occasional Discourse On The Negro Question to describe economics 168 years ago while he — brace yourself — put forth the ‘merits’ of reintroducing slavery to the British West Indies! (Note: The courageous William Wilberforce succeeded in having slavery abolished throughout most of the British Empire in 1833 with the passing of the Slavery Abolition Act. Wilberforce once declared, “So enormous, so dreadful, so irremediably did the (slave) trade’s wickedness appear that my own mind was completely made up for abolition.”)
Unbelievably, Carlyle thought it a good idea to advocate in his infamous essay a return to the barbarism of one human being owning another person 16 years after that emancipating act was passed by the Parliament of the United Kingdom. After his article was published, Thomas Carlyle’s glowing reputation lost significant lustre among right-thinking people who recognised human slavery as pure evil.
Modern day ‘slavery’
Interestingly, the dismal science of economics today helps us better understand a different form of enslavement that has its tentacles wrapped around us. This contemporary brand of slavery is all the more insidious because it envelops our minds, bodies, souls and wallets with... our permission! It’s the slavery of self-permitted hyper-consumption.
In David Chilton’s outstanding book The Wealthy Barber Returns (2011), he dispenses powerful lessons on personal finance. Near the beginning of that sequel to his even more famous 1989 bestseller The Wealthy Barber, Chilton outlines a macroeconomics formula. (Students of the dismal science learn that the field falls into two halves: microeconomics and macroeconomics. As you can tell from their names, microeconomics is economics of the small, such as one person or a group of people or a business, while macroeconomics is about the big since it attempts to explain the workings of the aggregated economy of a country, continent or planet.)
In The Wealthy Barber Returns, Chilton outlines this macroeconomics formula: DY = C + S, which means that in a large economic unit such as an entire country, DY stands for aggregated Disposable Income, C for Consumption, and S for Savings. Then — and this is cool — Chilton uses that macroeconomics formula to zoom down to the microeconomics level of one person! Let’s imagine it’s you or me.
At our micro level, our disposable income or DY is our income after we pay our income tax. So, as DY = C + S, we see that for each RM (or every 100 sen) of after tax income we have at our disposal, we may choose to Consume and thus spend it, OR Save and invest it. C and S are the only two choices; it’s a simple equation.
So perhaps we allocate 99 sen on Consumption and thus 1 sen on Savings, or 90 on C and 10 on S, or 60 on C and 40 on S; you decide on your own C and S as long as your equation balances with your DY.
Planning for the future
Consuming in the here and now is much more fun than saving for the future. We all understand that, and we may even feel it’s obvious and somewhat logical to behave like the fun-loving grasshopper in Aesop’s fable of The Ant And The Grasshopper. But, as Chilton writes:
“There’s a breakdown in logic. Remember, later in life we’ll all stop working. Our DY (Disposable Income, to remind you) will no longer come from our employment income — it will have to come from our S.
“No S means no DY. No DY means no C. No C means no... well, let’s not even think about that.” Chilton makes a powerful point we should all think long and hard about because it describes our future.
When I work with my financial planning clients, I focus on helping them divide their ‘S’ into ‘s’ and ‘i’, meaning actual savings and investments.
Each of us has a choice to make: Will we live mainly for now and allow our unbridled appetites to lead us to excessive consumption today that denies us a prosperous tomorrow? Or will we aim for a healthier balance between consumption for today and savings for tomorrow?
My recommendation: Don’t sacrifice your future abundance marked by healthy inflows of passive income for short-lived baubles and trinkets today that will cost you and your family a great future tomorrow.
© 2017 Rajen Devadason