Malcolm Durham looks at Maslow’s hierarchy of needs, our desire for safety versus demand for short–term gratification and comes up with a solution.

As 2016, and the Christmas holiday that only featured three celebrities passing (Carrie Fisher Debbie Reynolds, George Michael), are finally over, the hope is that 2017 will be different. The public transport chaos and the ceaseless fretting over Brexit - whether it will be a Full English Brexit or a Continental one – indicate that not much has changed. Yet there remains a desire amongst the over-worked and underpaid (aka the population) to re-evaluate how we are organised.

It seems to me that underlying the current mood is a belief that returns on capital are unlimited and enjoyed by few, while returns on one’s labour are restricted by capacity and capability. This is accentuated by two factors:

  1. Our desire for safety (the second most fundamental need after food, according to Maslow’s hierarchy of needs) allows capital holders to protect returns that are stated to be for the benefit of the customer;
  2. Studies have shown that we naturally put short–term gratification above a deferred version. This hinders our ability to reduce our disposable income and to invest so as to become more productive.
The safety argument is so strong it’s now being used by trade unions that have suddenly developed a desire to sacrifice days of pay to ensure that no-one is hurt during the dangerous process of stepping through a door onto a platform.

The trouble is that it reduces innovation, because anything new involves risk by virtue of the fact that it’s new and its effects are unknown. The Medical Health Regulation Agency now requires that any new formulation of a vaping product requires £150 for a new certificate. This reduces the number of new formulations available to the consumer despite the fact that the 4 basic ingredients are the same for each, it’s just the proportions that alter.

The reduction of risk also reduces returns. Banks prefer to provide mortgages to house owners than loans to housebuilders so that the supply of housing remains constricted, which preserves the value of the housing stock and so the recoverability of the mortgage. Worse, it keeps anyone in a pension scheme less well off than someone who manages their own wealth because pension schemes use the risk free rate of return when calculating a pension and currently quote a pension of £25,000 p.a. for a pension pot of £1million! Corporate capital demands, and gets, much higher returns and this dichotomy is one of the facets of the very different returns of capital and labour that is now newly auto-enrolled in a pension scheme.

If I’m right, then the solution to some of our problems is resolution:

  • Resolution to manage one’s own financial affairs so that returns on what you have are in line with capital’s returns. The Lifetime ISA is a welcome step in this direction (and in line with my suggestion at a Reform conference 4 years ago);
  • Resolution to accept some short-term pain for long --term gain. Whether it is re-training or setting up a new business, or both, a short term loss is inevitable. Government schemes can and occasionally do, provide a safety net.
Such resolution may not make 2017 happy but it would be new.

Malcolm Durham is co-founder of WealthBeing and Chairman of FD Solutions the flexible FD service.