Historical article note: This article was originally published on 2019-06-13. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
Recently, I crammed the reality show "U Can U Bibi." Season five, the penultimate show, the semifinals, was my favorite. Not only did the debaters perform exceptionally well, but guest commentator Professor Xue Zhaofeng's comments also touched on an important topic of my planned "Private Property Economics Storytelling Broadcast."
We'll discuss the main topic later. First, let me talk about my enduring admiration for Professor Xue. I've read his 'General Economics' and am currently reading 'Lectures on Economics.' After seeing his performance on 'Qi Pa Shuo,' my overall assessment of Professor Xue is: writing as sharp as a knife, beauty like jade, calm and objective, warm and pure. In reality stand-up shows, debate topics are always emotional, and in real life, topics vary by perspective, such as: Should a girlfriend ask her boyfriend to add her name to the property deed? An emotional topic answered by a rational professor shows just how dramatic it is.
The semifinal debate was, "If you could see someone else's 'time of death,' should you tell them?" Professor Xue's view was to tell them so they could reasonably arrange their lifetime income. Professor Xue's view actually raised another topic, and it was a very painful one: if you knew your own death date, your lifetime income might be different. An actor who achieved success early, a sports star, or an internet celebrity might earn a lifetime of income in a very short time early in their career. Unfortunately, no one stays good for a thousand days, and flowers don't bloom for a hundred days. When the trend fades, income drops sharply. If you can't balance your lifetime income well and live a long life, your old age will be miserable. On the contrary, some people are determined to achieve great success late in life, studying for many years and owing many student loans. Such friends fear dying young and ending up in poverty for half a lifetime. Can income be balanced just by wanting to? Income flows like a river because it is not static; not only is it hard to retain, but balancing it is even harder. Our lifelong challenge is the issue of income balance.
01 Lifetime income is the shadowed area beneath the income curve
Professor Xue provided a PPT during the program, illustrating three different income curves for the average person, early achievers, and late bloomers, and pointed out that the shaded area under each curve represents that person's total lifetime income. A person's lifetime exchange value with the world, expressed in monetary terms, is represented by the shaded area under the income curve. From the chart, early achievers have high income in the beginning and lower later; late bloomers have low income initially and higher later; we average folks have low income throughout, with only a slight rise in the middle. Coming from a family with no wealth or as a second-generation rich person, having low income before the age of 30 is normal and nothing to be ashamed of; you just work hard yourself. After retirement, it's uncertain how long you will live, and if a situation arises where 'you're alive, sick, and out of money,' then it’s not a matter of shame but a matter of whether you want to continue living. Furthermore, even if lifetime total income is quite substantial—that is, the shaded area is large—having very low income in old age is even more painful. Will you age while starving, recalling past days of indulgence? During the program, Professor Xue mentioned a golden phrase from economics: 'Investment is the balancing of consumption over time.' This phrase was said by Irving Fisher. Although it seems unrelated to income, as a fan of Professor Xue, I think this quotation is not only very well cited but also highly appropriate. 'Qi Pa Shuo' is an entertainment program, not an economics lecture, so Professor Xue cannot explain the economic principles behind it; he can only provide a visual impact for the audience and prompt them to think about the following three questions: What is the relationship between income and consumption? What is the relationship between income and investment? And how to balance lifetime income and consumption? Only correct economics can explain these three questions. Indeed, the world has long been ruled by incorrect economics, and now it’s time to introduce everyone to what correct economics is.
02 Only correct economics can explain the phenomena in life, however…
Economics is the social science closest to our daily lives. Being able to showcase the charm of economics in explaining social phenomena on entertainment programs reflects the Chinese people's determination and creativity to be entertained to death. Economics is neither an offering in the ivory tower nor an excuse for officials to justify foolish actions; it is essential common knowledge for each of us to understand the world and manage our economic lives. In my previous articles, I promised to carry forward the spirit of persistent nagging—nagging, nagging, nagging, nagging, nagging, nagging—and use the method of water dripping through stone to explain to everyone what correct economic concepts are and how to apply them to personal investment and financial management.
Modern economics has seen great confusion, and the root cause is Keynes, because he advocated that the government should become the master of economic life, rather than households. The government should take full employment as its responsibility and intervene in the economy with a visible hand. When households are reluctant to spend, the government should step forward to overspend national income in order to create jobs. We can now see all these detrimental effects; the economy is no longer a natural one. All kings welcome his economic theory of encouraging government spending. Looking around, which country is not heavily in debt? Keynes died too early to see the economic results of his own advocacy, and it was also because he died early that he became a saint. His theory's follower, Samuelson, divided economics into macroeconomics and microeconomics, creating 'macroeconomics' out of nothing. Worst of all, this idea was printed as a textbook. I think this was not Keynes' original thought at all. Keynes had a lifelong academic enemy named Hayek, who was, that is, one of the representatives of Austrian economics. There is a book 'Keynes vs. Hayek' that tells the story of this dispute in economics. The Keynes-Hayek debate of that time still has a vast number of supporters on both sides arguing endlessly today, but the government action advocated by Keynes to eliminate economic cycles and alleviate people's suffering has not yet produced results; Hayek's view that free market forces are more effective than planned/collective economies has been validated because all countries that implemented planned/collective economies failed. Hayek mainly studied economics from 1930 to 1946, after which he focused on social and ethical research. His most famous book is 'The Road to Serfdom,' published in 1944. The main argument is that a free economy is the way out for capitalism, while a planned/collective economy will lead people down the road to serfdom, warning countries nearing victory in World War II that if the post-war economic path is chosen wrongly, humanity will fall into an irredeemable situation. After the Keynes vs. Hayek debate, after the post-war economic recovery, and after the experiment of socialist planned economy, a conclusion was finally reached: Hayek won the Nobel Prize in Economics in 1974. Facing the facts and history, Hayek won. Before Keynes' theory appeared, economics adhered to the market; due to the prevalence of Keynesianism, market-believing economists, like Hayek, became conservatives, stubborn and old-fashioned.
Hayek's teacher was Mises. 'Human Action' is Mises' great work, representing the core ideas of the Austrian School: there is no distinction between macroeconomics and microeconomics; all economic activity is determined by human actions and cannot be precisely measured; the market's invisible hand always dominates the economy. The person who explained economics best was another of Mises' students, Rothbard, whose representative work is 'Man, Economy, and State.' It is a blessing for humanity that Austrian economics has returned to the mainstream. Chinese economists, besides Professor Xue, who firmly believe in Austrian economics include: Zhang Weiying, Zhang Wuchang, Chen Zhiwu, and Mao Yushi.
After talking all this nonsense, I just want to tell everyone that the economics textbooks and reading materials you used to read may have been wrong. One of the main reasons you are not wealthy now is that you read the wrong books. Professor Xue's book teaches real economics. If you want to read the simplest correct economics, read 'Economics on a Small Island'; even teenagers can understand it. 'Austrian economics' is human-centered, family-based economics; it is the foundation of personal wealth accumulation and private property economics. To give an example, there is a person in Shanghai known as 'Oushen'. He firmly believes in Austrian economics, so every time there is macroeconomic regulation, he says that housing prices will rise. People who have been influenced by other economic theories cannot understand how he came to this conclusion, but eventually the housing prices proved that Oushen was right. Followers of Austrian economics believe in the market, while followers of other economic theories believe in the government. This is the difference, the difference in life trajectories, the difference in personal wealth.
03 Scientific Approach to Income
Believe it or not, you might really not know what income is. Is income wages? Is income commission? Is income profit? Is income interest and dividends? None of these are accurate. Income has only one definition: income is a series of events. This sentence is the first sentence in the book 'The Theory of Interest,' and this definition was given by Irving Fisher. To this day, no one has been able to overturn it. The classifications of income are: 1. Enjoyment income or mental income; 2. Actual income; 3. Monetary income. An apple eaten or music heard is enjoyment income and mental income; bread and milk bought with money, or living space enjoyed after paying rent, is actual income; money earned through labor or investment is monetary income. Money that has not been spent is not income because there is no enjoyment; income that has been enjoyed but not yet paid for belongs to enjoyment income and actual income. For example, if you buy an apple with a credit card and eat it, but the bill has not been paid, there is actually already income. This kind of income belongs to both enjoyment income and actual income, but it is not monetary income. Fisher's definitions and classifications above have been repeatedly cited by Zhang Wuchang and Professor Xue and are considered the most fundamental and accurate definitions in economics. In my own understanding, to put it simply: income is a series of events that you have enjoyed or are about to enjoy; it is a state of flow.
The monetary income we receive is only actual income when it is used for enjoyment; if the monetary income is not used for enjoyment but instead invested, it is not income, it is investment. Enjoyment means consumption. Now, looking back at Professor Xue's quote in 'Qi Pa Shuo,' 'Investment is the balancing of consumption,' we can only understand this once we have grasped the definition of income, actual income, and the relationship between monetary income, consumption, and investment: investment behavior is the act of setting aside the surplus monetary income when it exceeds consumption as a way to balance consumption over a lifetime. Conclusion: We can balance our income over a lifetime, and the method is investment.
04 Income reflects a person's underlying ability
The ability to make money reflects a person's irreplaceability in this world. The higher the income, the higher the reflected irreplaceability. The only way to increase income is to improve your underlying ability to make money—product capability. Organize the knowledge you've learned, the experiences you've gained, the skills you've mastered, the wealth you've accumulated, and the inheritance you've received into products, and sell them. This series of product thinking and sales abilities constitutes the most fundamental money-making ability. In the industrial era, people always sold themselves to an employer in exchange for a salary, and such income could not be balanced over a lifetime. In the information age, those who can assemble their abilities into products and sell them do not necessarily have to sell themselves to an employer, which also lays the foundation for balancing lifetime income. The reason for low income lies in foundational thinking: whether you have product thinking and sales ability. Liang Ning, the talented woman from Zhongguancun, has conducted in-depth research on this issue, and everyone can read her articles.
05 The underlying cause of anxiety is the inability to control future income streams
When we wholesale our time to employers, and the employers cannot guarantee our future income, the worry about the stability and sustainability of future income becomes the root of our anxiety. Many self-help articles online discuss the anxiety of the middle class; they seem very reasonable when reading, but are forgotten afterward because they do not address the root causes of anxiety or provide solutions. High earners worry about whether they can maintain their income, while low earners worry about what will happen in the future. The reason is that in times of inflation, even if you can maintain your monetary income, you may not be able to maintain your real income, let alone if your monetary income is also unstable. If one finds a way to maintain real income, no one would be anxious anymore. Think about it: if someone guaranteed that no matter how long you live, your daily income would be enough to pay rent and eat seafood, would you still feel anxious? Everyone's most fundamental anxiety comes from uncertainty about their future real income.
06 Income Balancing Technique
The total income of a lifetime cannot be calculated before we close our eyes, and we don't know how long the income curve will be, so the shaded area below cannot be calculated either. We simply won't study unsolvable problems. Balancing a lifetime of income relies entirely on investment, and what investment can do is make money generate more money, make money work for you, and create passive income, ultimately achieving a situation where you can enjoy life without depending on the government. Those who trust the market know that it only rewards the winners of competition; those who trust the government, in fact, do not believe in their own competitiveness in the market. The final winners in competition are those whose passive income replaces labor income the earliest. Using money beyond consumption for investments in stocks, bonds, real estate, antiques, gold, Bitcoin, whatever, as long as it can generate passive income, is acceptable. Investment assets are just the hens in the process of laying eggs; which hen it is really doesn’t matter, but it must be a hen. Income balancing technique one: create passive income and make money work for you. Eggs are income, the investment asset is a hen; invest in a hen that can lay eggs, don’t rush to kill the hen, just find a high-yielding hen and take good care of her.
Whether an investment generates current income or not depends on the investor's other non-investment income and tax policies. For someone with an annual salary of 220,000 yuan, the tax bracket is already 53.53%, so when investing in real estate, they should not pursue current rental income; otherwise, the net rental income would be taxed at 53.53%. For high-income families, if they invest in real estate, current cash flow and rental income are not important. Instead, they should keep leveraging, increasing deductible expenses. Income balancing technique two: high-income families should not invest in products that generate high current income; they should choose investments with high growth potential but low dividends. Eggs are income, and if you take the eggs, you have to pay taxes, so you should use the tax system wisely to defer taxes as much as possible.
Every year we have to submit an annual income report, the T1, to the tax office, which lists all income from the past year. The highest annual passive income I’ve seen for a couple is 360,000, including interest income, net rental income, dividend income, capital gains, and other income earned while sleeping. For the vast majority of people, the amounts of these passive income items are only a few thousand per year. Active income, including salary, commissions, business income, and so on, requires personal effort and can only be earned while awake. Income Balance Technique Three: Set a goal for yourself to increase your passive income to half of your active income at age 45 by the time you turn 65.
Conclusion: Low income is due to a lack of product thinking and sales ability. High income, however, cannot be sustained solely through active income. The source of passive income is investment, and learning to invest is a personal task. On the road to pursuing lifelong happiness, balancing lifelong income is the greatest challenge. If there is no need to balance lifelong income, living for today means that when old age comes, you can only worry tomorrow about tomorrow. A few days ago, I read a public WeChat article by Sousan Kuang, which discussed two levels of happiness: one is happiness, the other is well-being. The former refers to feeling pleased with life satisfaction, while the latter refers to a state of vigorous development. If one cannot find happiness, could it be that one has not found the direction of vigorous development? By striving to balance lifelong income and achieving goals in the process, at the very least, one can eliminate anxiety and ultimately enjoy a life of vigorous development.