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The next big economic breakdown

by on 14/07/2018

In the essence of any macroeconomic considerations stand three major economic questions.

  1. The time period the economic actors plan to achieve their economic goals, that can be short term, medium term and long term.
  2. What drives the economy, aggregate demand or supply.
  3. What comes first,  money or the product?

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While economy was rather agrarian activity an economic time period for consideration was one season. The economic cycles were caused by weather conditions, that either enabled plenty or lack. Since the beginning of the industrial revolution,  but mainly since the second half of the twentieth century, the economic and political leaders had to relate their policies to much longer term considerations than one agrarian season. Industrial revolution needed adaptation of the technologies, capital accumulation, workforce training, etc. All these needed more time than one season. Since the late sixties of the last century, consumers society was introduced at first in post war Europe and Japan, then in most of Asia, and South America, and since the collapse of Soviet Union also in this part of the world. Together with population growth from about 2 billion people at end of WWII, to 8 billion today, the human impact on the environment created accumulation of dis-balances, their solutions need time schedule if dozens of years. This sudden increase in pressure on global resources needs change in political decision making processes, from short term to long term considerations, that were not adopted yet.

The short-term period i would define as 1-4 years period. In short term the planning is annual, when national budgets are discussed and approved by the political representatives of the people, or with annual financial reports, when represented on the shareholders meetings by the executive management. When a new political leader is elected, at the beginning of his term in office, his expected time period rule is usually four years, that shortens with every day. Since economic achievement are represented to the electorate before end of his political term, the economic-political considerations of the decision makers are influenced by rather short term problems. The time period of presidents or corporate managers planning is decided by arbitrary political or accounting habits, like annual reports of corporations, national budget approvals, or election day date. So decisions about implementing activities, solving long term problems, mainly if the solutions demand investments in infrastructures, their effect will be felt by the electorates beyond the term relevant for evaluation of the decision making institutions success, are usually neglected or postponed. This is truth unless a sudden unexpected crisis brakes out, like war, global economic collapse, public uprising, etc.  Then the short-term considerations are neglected, and crisis management system is implemented, neglecting the previous concepts and ideological considerations. The very best example of such a sudden change in policy is the budget deficit of the governments.

When the crisis becomes manageable, new long term or medium term considerations become leading. These are also situations,  when old school ideas are replaced by new ideas, and new thoughts are allowed to be exposed, while the old ones are reconsidered and criticized.

The medium term economic period is between 5-15 years, where the market forces have enough time to react to crisis situation, caused by resource limitation, as it happened after oil price jump between 1973-1985. This crisis was followed by trying to develop alternative energy sources.

The private debt crisis of 2008-2016, that endangering the global monetary system, was treated by monetary instrument, called Quantitative Easing, unthinkable before the crisis. It was used not only because the possibility of its fast implementation, but also because the authority who operates monetary policy is federal reserve governor, who by profession is a professional economist and not a politically elected legislative representant, with conservative rigidity and no capacity to adopt abstract macroeconomic concepts, needed to comprehend money as a monetary tool for macroeconomic policy making, and not a fetish.

The modern economists have pretty good tools to predict the future developments in medium term considerations, and have tools to cope with these medium term crises. These tools didn’t existed or rather were not used at 1929, when the world economic crisis broke out, that could have been coped with modern economic tools relatively easily, but because of colossal mistakes of the economic policy decision makers, the crisis turned to a long term global crisis, that ended only at 1945, with the end of WWII, in the Western world. The major political conclusion of the elites governing economy in the “West”, from the 1929-1945 years crisis was, to adopt economic policy, of responsibility to provide full employment, that will give chance to every household head reasonable chance to  provide his family with decent income, and to live productive life, when being part of social community, he can positively identify with. The other need recognised by economic policy makers is monetary stability, that meant keeping price levels fixed. But these two goals, full employment and stable prices, contradict themselves, and certain level of inflation is needed to secure full employment. The problem is that inflation disturbs the level of equality of income in the population. It delluts the accumulated wealth of the savers and enriches the borrowers. It also disrupts the price system, giving opportunities to short-term investments, upon long term investment.

From time to time, usually because of crucial mistakes of economic policy makers, inflation tend to break out from manageable level to unmanageable levels.

Long-term considerations used to be of lifespan of productive person. This stands behind all kinds of pension savings, that can be in form of investing in pension funds, savings, but also giving birth and educating the next generation of children is form of saving used in traditional societies. People on every country and almost every society and culture start these savings from early adulthood, until retirement. Only the very rich individuals or very rich societies will have long term economic considerations that exceed their individual lifespan.

In modern economics, long term period changes, are processes, i would define as more than decades time-period, where existing market conditions go through paradigma change, due to radical technology changes, or social and political changes due to collapse of political or economic system. It happened between 1929-1945, period during which new political order was created world wide. Other paradigma change due to technology happened in years 1980-2000, or alternatively can be defined the period between 1950-2000, during which at first appeared the computers, that later evolved to smartphones, and with it created the connection of general public to world web network. This change wasn’t just about adopting new products and technology, but a complete change in way of life, production technologies, management systems, new marketplaces, leisure time, etc. None of these developments could be predicted and prevented or regulated by economists or political activists, before they were invented, and when introduced to the market, no-one, not even the inventors and initiators themselves could predict exactly economic impact,  these technologies will have.

Since the late sixties, the public started to understand, that processes with cumulative tendencies, cause human impact on global environment, that demand consideration beyond human lifespan. The understanding that if not taken in consideration the very long term trends, the globe can flip over a no return point, from where a new uninhabitable environment will be dominant in most of the globe, just as it already happened for natural spices of animals and vegetations. The existing political-economic system, still driven by yield hungry capital, has no tools to cope with the mounting problem of global ecological disbalance accumulations. The result is local ecological disasters, and threat to the global ecological system.

———–

Other basic question economists are divided upon is, if the demand – or the supply is the major steering force behind the economic processes.

Those who see in the demand the main engine that runs the economic change, believe that every additional aggregate demand will be satisfied by additional supply or/and price change, that will adopt the demand quantities to available supply. It means that the supply side of the economy can be neglected in macroeconomic considerations, and left to the market forces to cope with.

These economist does neglect in their models the limits of disponible resources. Their assumption is, that the market with flexible price system, competing suppliers and consumers, will always balance itself at certain price level. If there will be a price jump, due to limited resources occurring in the short-term, on the medium-term, the economy will adopt itself on new absolute and relative price levels, and also new employment levels of production capacity.

On the other hand, economists, who see the supply as the major motor of economic change, believe in finality of economic resources, that no technology can overcome them. Such resource limitation obviously exists because of limited size of the earth. The supply side economists understand, that resources can be supplemented by new technological developments. (For example, energy crisis of seventies, brought to the world new energy generating technologies.) But there are still limitations, that cannot be overcomed, because of long term one line trending processes, that accumulate disbalances on global scale, their correction is beyond the capacity of human spices.

The best example of economic policy driven by supply side of the economy was the Soviet economic system. Their emphasize of production and absolute neglection of demand, brought disastrous economic consequences, including famine, lack of basic products etc. On the other hand, one sided emphasize of demand, without considering the cumulative entropic tendencies of continuous economic growth, brings from while to while the economy to its limits, when it collides with resource limitations. The 2008 economic crisis can be considered as such a phenomenon, when the commodity prices included in CRB index https://www.investopedia.com/terms/c/crb.asp jumped before the crisis by almost 50%, and collapsed immediately with the outbreak of the crisis by more than 100%. Even if the financial breakdown is the direct reason for the 2008 crisis, the sharp increase in commodity prices before the crisis, indicates bottleneck situation of production capacity at existing prices, that wasn’t translated to consumer prices inflation, but a economic breakdown. The hypothesis of such a connection, not so obvious, exists, since the financial manipulation implemented before 2008 crisis, created economy based on deep debt in private households, supporting consumerism, in parallel with real wage decline. The debts, that supplemented increase in wages, were either against real estate value increase, or against consumers credit, conducted by the financial system.

———————–

The last central issue, economists are divided upon is the question, what drives the economy, money or products. While money is an agent without practical value by itself, because of habits, norms, faith, traditions, and sovereign right of governments to issue this money, and authority with threatening power to impose taxes, to be paid in the same money, gives to this agent, without value by itself, an exchange value, universally recognized and accepted. While money without production has no value by itself, value of product without money cannot be measured and exchanged, or it would be difficult if not impossible to measure it’s relative value. But because money’s generally recognized and accepted fixed exchange value, money has also capacity to keep under certain circumstances its value stable, or even appreciate through time. This makes money to own two attributes, exchange value measure tool, and fixed value keeper capacity tool. While money acts as value holder, it is deposited in savings where its value is either stable or even appreciated, with the interests paid on the  savings.

Since economy exists only with exchange of goods, and such an exchange can’t be even imagined without universal exchange value media (money), it can be said, economy came to existence with money. Also aggregate money value in exchange circle represents the same product value in circle. (currency exchange is a special case, not included), it means by increasing money exchange value circulation we necessarily will increase products value circulation. But here comes in the scenery the question of limited versus unlimited resources. If the global resources are final, and be it the capacity of the earth to absorb the effect of cumulative processes, without balancing feedback, the whole economic model based on continuous increase in aggregate money and product value circulation have to break down.

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