Dipl. Eng., Department of Social Sciences
Faculty of Civil Engineering, Czech Technical University in Prague email@example.com
Crisis and role of information
The crisis and the globalization represent one of the most interesting and most discussed contemporary themes. There are mentioned many changes in the world: labour, capital, information. Information is the most important capital of these days. Information is the determining factor of globalization; and asymmetric information is also one of the reasons of financial crisis.
Crisis, globalization, knowledge, information, asymmetric information, information channel, securities, mortgage
Financial crisis – one of the most discussed topic of last days. All the time we can hear from media, how the financial crisis weakens the economic development of countries, how further banks go bankruptcy, corporations are forced to shut down their production and stock exchanges report huge failures. Why have the financial crisis widened so quickly? And what was the reason for it? In the following text I try to outline the influence of the information asymmetry to the birth of crisis and reason of its quick spread to the globalized world.
Globalization is the process of convergences and interconnection of the economics, cultures and politics of different nations and states. This process has got significantly sped up during last decades thanks to implementation of new information technologies, what definitely opened new possibilities especially at capital and financial markets. To this situation has furthermore conduced the liberalization of international trade and forming of a uniform international market. Although the globalization was understood at first as a more economic phenomenon, connected especially with the inflow and efflux of investment capital, recently it is clear that the globalization shows itself in all fields of the life.
Even if we shall analyse any of the fields, affected by globalization, there will always be one common point: the information. Together with rapid development of information technologies has the transfer of data to overwhelming distances extremely simplified. Information can get around without dependence on people and subjects. The greatest contribution in last decades was of course the birth of internet web, thanks to that everybody has the possibility to share information from all worlds nearly at no costs.
Even it is spoken in these days about that the world is at the beginning of a completely new age, the age of the information society. Thus we can talk about the forth production factor: besides labour, capital and land it is namely information, generating the value.
A lot of people, corporations and whole economic centres can take advantage from globalization. New possibilities of expanding the production, gaining of fast and cheap information are now opened for the firms. Really, the globalization facilitates the production factors much more effectively. In the following part I will take aim to the impacts of globalization to the individual production factors, including influence of the former mentioned information.
“Rational” decision making
Although the globalization is an event more macro-economic and represents an influence to complete economies, states and world in global, the most important element of the analysis remains the firm. Because what else than firms can build the economic? The firm as an integrated unit of relationships, what – according to the definition of neoclassical economy – reforms the inputs to outputs. The firm must steadily battle the barriers, existing in the market economics. In comparison to the artificial model of a perfect competition the firm in a real world ha to face the costs for looking the suitable partner, to wrestle the consequences of its bad decisions (because there is no perfect rationality and everyone sometimes makes bad decisions). In this sense the globalization and together connected information boom are a very favourable thing for the firms, because the possibility of gaining fast information save the time and costs and it can many times protect the firm from a bad decision.
Nevertheless when we declare, how huge role is played by information in recent time, we must at the same time admit that we do not live in a perfect word of perfect information and that the premises of the neoclassical theory are not real in an actual world. The firms have indeed better access to information nowadays, they can however to collide with two barriers:
Irrational behaviour, what means that a perfectly rational man (as described by neoclassical economy) does not exist; in practice it is confirmed that a man acts mainly with limited rationality, because even in a world of information technologies is not always possible to obtain 100% perfect information. Man must be either satisfied with a limited quantity of information, or the obtaining of perfect information is simply too expensive and therefore unreal.
Another phenomenon of this era is opportunistic behaviour (following of own interest even if at the price of a trick, deceit, shuffle and fraud), because in a real world a man makes such decisions, what are advantageous for himself, not looking to the affect to others. From the economics’ point of view such a man acts ineffective; from the individual’s point of view he is making his own benefit maximal. This can however be at the expenses of somebody else.
On one hand there is much bigger access to information, on the other hand with the raising quantity of them is growing as well the threat of emerging of imperfect, asymmetric information, in extreme cases even a threat of moral hazard. For a vivid example, where into can the impacts of asymmetric information together with globalized markets flow, it is not necessary to go too far.
Asymmetric information and financial crisis
It moves the world in last years and it presents a topic number one – the financial crisis. It is enough to be aware of what caused this financial crisis and how big and on how many places was the role of information (especially the asymmetric information and opportunism).
On my part I would name this crisis a crisis of spirit, a crisis of morality, a crisis of ethics and responsibility of a man, who is oriented to the consumer’s way of life only. This way of life, so comfortable and pleasant was so charming, that in a moment when the limited material sources draught out, there came a new phenomenon of last era – living for credit, debts, loans, credit-cards etc.
Despite to that, very often it is as reason starting this crisis identified first of all the system of granting the mortgage loans in American markets and their consequent securitization. Already at this moment we encounter the influence of information and opportunism. When hunting for profit the banks in America have been approving also clients of less stable financial standing and providing so called sub-prime mortgage loans. These loans were afterwards traded at financial and capital markets, under participation of local subjects and thanks to globalization of financial markets of foreign subjects as well. As soon as these sub-prime households were not able to repay, came to bankruptcy not only the local banks, but thanks to the connected system also the foreign subjects.
Globalized markets made the crisis possible and sped up its widening over the US border. Information, asymmetric information and opportunism allowed happening, that such mortgage loans have even been provided. Such situations are here presented at various places. So for example there is the relationship between a buyer (debtor) and real estate agent. In this case the real estate agent has information overweight, because he knows well the market situation and position of the given real property. Looking to the fact that we can suppose an opportunistic type of behaviour at him, the result of negotiation (the contract) can be influenced by misrepresented information.
The relationship between the debtor and the loan-providing bank: here has the debtor information overweight, because he knows his payment ability better, than the bank can discover from several statements.
The relationship loan providing bank and a subject (other bank, investment bank or corporation etc) investing to securities covered by these mortgage loans. In this case is the information overweight on the side of the loan providing bank, because it will know better the portfolio of contracts.
Several simple examples have demonstrated to us, what role information is playing in decision making of all participating subjects. Information is the powerful moving engine, what forms and influences the entire world. If it were not for this way of living, living on credit, so despite to risk of opportunism would not the crisis reach to such deep phase, even what’s more, it should not start at all.
Crisis of spirit, crisis as an oportunity
Every up to now searching of the „medicine“ against crisis were oriented to material mechanisms only; these can however only to reduce, eventually to postpone further crisis impacts. It is necessary to realize, that the economics does not exist somewhere around us, as a certain fictive reality, but the economics is significantly influenced by the psychical status of the people. Therefore this crisis can be – as I have mentioned above – called a crisis of spirit, a crisis of morality, a crisis of ethics and responsibility of the man.
The recent crisis has been forming during whole last century, when the people had one target only: “using the favours of modern life” as much as possible. This way of life, so comfortable and pleasant was so charming, that in a moment when the limited material sources draught out, there came a new phenomenon of last era – living on debt, credits, loans, credit-cards etc.
All the provisional suggestions for eliminating the crisis has been made only for getting the society quiet and not admitting “derailing” of all the recent habits of that consuming people. Frankly speaking, what is to be expected of it? Only another, stronger crisis, what can just break up soon after a seeming repress of the recent one.
Besides that, there is the only target of corporations – hunting for the biggest profit, managers are struggling for highest benefits, very often investing too risky. The point of view of investment risk rate is nowadays shifted to a side track; yield is the main determinant standard. These managers don’t moreover hesitate to get the firm in debt because of a risk investment – and then a littlest impulse from financial market is enough to make the crisis real.
In which way should we look at this crisis? Let’s try to take it as an opportunity. Opportunity to change our own irresponsible access oriented to consumption, living on credit, hunting for profit by a more forethought access aimed to savings and well-considered investment.
Nevertheless we here from media about the negative points of the crisis only, the recent financial crisis has brought also some positive factors, what can be the rightful instruments, how to get off it at the same time. Hence for example the labour market gets cleaner. Though during this crisis many people will lose their jobs, this however leads consequently to increased offer of labour and to higher possibility of choice at the hands of corporations. To a position, what was occupied by a man less competent or experienced is coming now a man, who is more suitable for this job and the corporations can to produce more with this man, to extend production and to get jobs for other people. This raising of labour offer is however determined by a presumption, what is regrettably for many people rather ambiguous, namely by a tendency of workers to look for a new job even if at the cost of possible longer commuting to work. From the raised offer of labour positions flow as well another positive of the crisis. The corporation will stop over-paying of new employees, because there will be bigger competition for a certain position and it will not be possible anymore that some individuals interesting for a job dictate even unreal requirements. On the other hand, the corporation, who finds a really competent employee to the firm’s full satisfaction, will be glad to take care about him to prevent his loss. Its investment to him will pay off even from long-term look. This everything leads to improving the corporation’s attention to recent employees.
In case that a corporation is forced to lower the number of employees because of crisis or to cut the working hours, the part-contract works or home-based work can prevail in the interest as well of workers as employers. Increasing of the part-contract works offer facilitates to continue the production despite that they are not able to employ the people in full time jobs. On the other hand the readiness of the firms to employ more people for part-time jobs make them possible to find another job, or minimally not to lose it at all.
At the same time it is possible to presume it will come to equalization of salaries between men and women at the same position. During the crisis and after it the corporations will look for qualified employees a if they find such one and decide to invest to him, they will expect that money and benefits invested to this employee will get back in a form of perfectly accomplished work – not looking if by a man or a woman. In this way we are still expressively behind Western Europe.
The era of crisis will get a „testing period” for a huge number of big bosses, directors and company’s? managers, because only in hard times would be proven the right characters and competence of the chiefs and it will be shown, who of them is really able to lead the firm even in hard times and who can really deserve their sometimes even hundreds-thousand salaries. At this time is the chief under a test, if he is not only expert in economics and management of the company, but if he is a real leader of his team. Especially at this time, when people are afraid of the jobs and some of them suffer by depressions, the boss must be ready to keep the positive intern atmosphere in the corporation, to invoke confidence among the people and to motivate them to further work. Only in this way he can create a team, able to operate properly and to reach good-class results even at the crisis time. Nowadays more then another time applies that a proper manager or leader must be a good psychologist as well; he must be able to work with people correctly, to estimate and motivate them and negotiate with them.
The positives of the crisis can be found in other branches, not only in human resources management. When a big number of people fall into financial difficulties because of the job loss and they are not able to meet and repay their obligations any more, they will be for next time much more careful in further running into debt. In course of time the level of savings will increase again. Let’s hope that the trend of steadily incurring households’ debts last years will be stopped. For example an average American owns 4,4 of credit-cards today. The Europeans live in the meantime for credit less than in USA, nevertheless the trend aiming recently to the growing use of credit-cards rules in Europe as well. Again in comparison to USA, the level of household debts does not exceed 43% of GDP, in contrary to USA, where this level reaches to 135% of GDP.
The crisis and the fight for survival motivate the firms to bigger endeavour to think out new and cheaper procedures of production. The time of crisis wishes for new technologies and various innovations.
And last but not least, no fewer positive of the crisis is deflating of price bubbles (for example the price bubble at the real estate markets) and the prices are coming back from breathtaking heights back to the normal level and are getting more affordable for general public.
Information that is the point! The importance of information in economic decision making can be even with a little exaggeration expressed in this way. We see around us many examples, how behind any bad decision is possible to find imperfect information. In the world of internet and globalization, when we are flooded by enormous quantity of data, we have continually to face the question, what information are the perfect ones and what not, eventually can we within this transaction count on opportunism or not? The example of the power of such information we have still in mind and on eyes, because the media still inform about the crisis impacts. On the other hand we cannot consider the financial crisis negatively only. A man is a teachable being; therefore let’s try to feel the crisis as an occasion, occasion to take a think about the recent trends of economy. Let’s take it like a warning, what everything can happen, when we are living for credit only and not taking in respect the future. When the crisis started yet, let us realize, what kind of positives it is offering to us, how can we learn from and how to exploit them, for example the new opportunities in human resources management and recruiting new employees.
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