High time we got back to economics. Naturally I’ve been generating plenty of opinions on the economic situation even as I sit on my hands these last couple of months. Today, the deluge.
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Review: What is wealth? Recall that economics is the study of how to use limited resources to meet unlimited wants and needs. Wealth, then, is what helps meet those needs. Food comes to mind. Houses. Clothes. Toys. Medical care. An afternoon spent rolling in the maple leaves. These are kinds of wealth.
We work to increase our wealth. We increase our wealth by taking something we value less, adding human labor, and turning it into something we value more. A packet of seeds and a patch of dirt, turn it into food. A pile of lumber, turn it into a bookshelf. Knit a sweater, write a story, build a car, put a trail through the woods or a road through the prairie, whatever it is we want.
–> And sometimes we just work, or refrain from working, in order to preserve or enjoy the wealth given to us. Clean water, mountains, beaches, creeks, swamps — these things meet a need we have. We don’t make them, we just do our best to maintain them and avoid destroying them. They are a most definitely a kind of wealth, as real estate prices make clear.
Wealth-generation versus busyness. Not all work generates wealth. Think of digging a ditch and then filling it back in. Or filling out a long complicated tax form. Aside from the zen exercise, I argue that no wealth has been generated by your busyness. Opportunity cost is part of this equation. It isn’t that the ditch-digging wasn’t helpful for building muscles or teaching patience, or that the tax form didn’t grow your mental powers. But the same amount and type of work would have generated so much more wealth if you had devoted that time and energy to doing something that was actually wanted.
–> Wealth depends on *wanting* what you produce. Okra comes to mind. A treasure house of okra does very little to meet my unlimited wants and needs. Perhaps not so for you. But for me, please, make it tomatoes.
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Where does an economic crisis come from?
We’re having one. And understanding where the crisis comes from is the first step in trying to resolve it. Oh, I don’t know either. But today we’ll talk about the general principles, and maybe that will give us some clues.
Two broad sources of economic crisis:
A tremendous loss of wealth. Either the destruction of what you currently have, or a failure to be able to produce what you normally require. Hence the traditional sources of economic crises: disease, famine, crop failure, war, corruption, earthquake, flood, tsunami, fire, etc. etc. What you have is destroyed. You are poorer. Or what you need — say, food — you cannot produce.
Have we experienced this lately? I think so. Quite a few wars going on just now, and the US is involved in a couple of them. Expensive and destructive. Not too mention the tying up of labor and resources that could be spent actually producing wealth. More expensive than not going to war? We could argue all night. But consider the possibility at least that our current wars are costing us wealth. Worth the cost? Perhaps. But let us not be surprised if the spending of our wealth makes us poorer — even if we are happy to be poorer.
(It is okay to spend one kind of wealth – say, lives, tanks, fuel, food — to get another, say, peace. But just don’t be surprised when you are short on the one if you’ve gone and spent it.)
You may also recall the last several years were busy for natural disasters. Can’t lose the bulk of the Gulf coast to hurricanes and not be poorer for it. Easy to look at the busyness of re-building and think how swimmingly the economy is going — and forget that all the busyness is the work of replacing what was lost and destroyed. All that work is to replace lost wealth, not to generate new wealth.
Plenty more examples. –> We should consider that at least part of the reason we feel so poor lately, is that we are so poor. If so, part of the solution is stop the causes of on-going loss, and then to generate new wealth. To the extent that loss is unavoidable, we have to accept our poverty. Which brings me to the other source of economic ‘crisis’:
Fantasy exceeding Reality. All this talk of ‘bubbles’ and ‘speculation’, is mostly this. But think first about your personal life. Ever have a time when your imagination takes you one way, and later you discover reality was the other direction? A crisis results . . .
It is, say, the end of the day and the house is a wreck and suddenly there is a whirlwind-of-cleaning-crisis because you have a big mess and neither time nor energy to fix it. Much yelling at children and bickering with the spouse. (Ahem. This is, of course, a purely theoretical example.) The fantasy of ‘we’ll clean it up later’ collides with the reality of ‘I should have started cleaning sooner’.
Financially we do the same. You take out loan on the expectation that future income will come in to help you pay the bill. Or you spend today’s income on new clothes and a family vacation, and forget that you needed to set aside that cash for the emergency fund or the kids’ college. When reality intervenes, you are stuck with a loan or expenses you can’t pay, and you have a ‘crisis’.
This can happen on a national scale, too. We borrow today for a spending program, sure that tomorrow’s income will allow us to pay it back. Well, if we as a nation don’t generate the wealth to pay back our loans, we end up in a crisis.
–> It is easy to deceive ourselves about these ‘crises’. I’m sure I would have had the house clean if only the baby hadn’t picked just this moment to take up cooking. Well, perhaps, but how many children must you have before you learn what it is toddlers do, and plan accordingly? Likewise, financially, surely you knew that the kids were going to grow up and want to go to college? Surely you considered the possibility that you wouldn’t get the raise, that your car might break down, that the hot water heater might go out . . . we can’t plan for every disaster, but a certain amount of turmoil? It’s going to happen, you’ve got to allow for it.
Nationally, just as likely. Big spending programs built on best-case-scenarios are going to leave us crunched for cash when the best-case doesn’t happen.
And one other source of economic woe: Poor distribution of resources. Nobody go running for Das Kapital. But, but, but: how wealth is spread around society does have its impact. The well-being of the economy — that is, how well our resources are being used to meet human needs — is measured not only on by the average-well-being, but by the well-being of each individual. What with society being made up all these individual human beings.
I mention this just to give you one more clue to consider. Compared to other countries, I think the US does pretty well — not as well as I’d like, but better than we could. Still, when looking for ways to improve the economy, look at your tax code, your inheritance laws, your education system, your health care practices, your wage laws, your lending laws: How do these impact the flow of wealth? Do they help the poor end of society make at least a modest living? Do they encourage enterprise? Do they encourage us to make good use of resources, or are there bizarre incentives towards wastefulness?
–> One of the results of our specialized economy, is that in a crisis, a portion of the people end up with nothing. As they said during the great depression, if you had a job, you were fine. Specialization of labor is a good thing — we end up wealthier as a society, and for the most part, as individuals as well. But if we are going to enjoy the benefits of specialization, we also need to make provision for the unemployed.
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What about the complicated financial situation?
Remember that money is backed by the wealth of the nation. Even in a gold-based economy, that hunk of metal is not being passed around because of its own inherent worth (gold is useful, but not that useful), but as a token to represent the wealth of its owner.
Yes, yes, you can really mess up a financial system through poor management of your coin-minting process. Yes, look at your financial system and figure out what needs to be done better. And I’ll say right here that the FDIC did just what it was meant to do, and prevented a massive run on the banks. Good job.
–> But make sure you aren’t looking at the mess in the financial markets, and blaming the market, rather than the economic situation it represents. I’m reminded of last fall when everyone was lamenting that you couldn’t get approved for a car loan as easily as a year earlier. All the sudden you could only get approved for a car you could actually afford. Nothing wrong with that particular financial market, except that it hadn’t come to its senses sooner.
I do think our current financial-system-practices encourage the whole fantasy life problem. Don’t know what to do about it, though. The same financial instruments that cause such temptation and disaster when abused really are good and useful in their place.
I expect there is a need for reform here and there. Certainly transparency is a great help in protecting investors. Mostly though I’m afraid that the push is to rescue companies whose only ‘crisis’ is poor business practices. To a certain extent, you have to live with the pain of your thoughtless actions, and take responsibility for your own misguided choices.
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So about that stimulus package . . .
You be the judge.
Does it provide for the basic needs of the unemployed?
Does it address wealth-drains, such as corruption and bureaucratic complexity?
Where it invests, is it to produce infrastructure or goods that are truly needed? Is it careful to limit spending so that we aren’t blindly putting out okra and moving piles of dirt left and right in the quest for busyness, but with no check for whether our work will produce actual wealth?
Does it encourage private investment and enterprise?
–> Does it limit government spending only to areas where there is real reason to believe the private sector can’t or won’t step in to address true wants and needs? Does it avoid excess spending, so that capital markets have funding available to lend to businesses?
Is it based on realistic expectations for our ability to pay back the government’s loans later? Or are we signing ourselves up for an economic ‘crisis’ down the road, when we are forced to face the sad truth that we are not as wealthy as we had expected?
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Enough for this month. Next week: Review/report on Requiem Press’ Church and State in the Middle Ages. Ha, dismal sciences everywhere.
