By David Barr, on September 29th, 2009
I recently came to a rather obvious, yet remarkable insight. The 20th century was a truly unique and remarkable moment in human history. There is not a single aspect of human civilization that changed less during the 20th than in any of the centuries that came before. Population, economic output, life expectancies, oil consumption, meat consumption and international travel are just a few of the countless factors that changed more between 1900 and 2000 than in any other prior hundred years.
Expectations for the future are with few exceptions rooted in this period of explosive change. Some scholars have traced a variety of trends back into the more distant past, but these works are largely viewed as curiosities on the fringe of economic and social thought. For better or worse most of us are happy to assume the order of things that emerged after the Second World War will hold steady throughout ours and our children’s lives.
Economic growth has been both the great cause and great consequence of the recent pasts explosive change. By rapidly expanding the total available wealth, this expansion has allowed the general population to enjoy unheard of prosperity, without threatening the comfort of the elites.
Growth can be broken into two pieces; basically more people consuming more stuff. Population growth has obviously been the major driver of the first component of growth. From 1900 to 2000 the number of people on the planet rose nearly 4- fold to approximately 6 billion. Just as dramatic was the increase in the number people actively engaged in the globalized economy.
For all the wonders of the Pax-Britannica, world trade really only impacted a small percentage of humanity, in Europe North America and a handful of aristocrats scattered around the rest of the world. Today, only a small number of subsistence farmers are cut off from globalization.
If population growth were the primary driver of economic expansion, we would be living in Malthus’s world. The miracle of the 20th century was the dramatic rise in living standards that accompanied population growth. I don’t have time to recount all the ways in which living standards have improved since 1900. Look around you, the growth is obvious.
Is the 20th century repeatable? In 2100 will our heirs see 2000 through the same eyes that we see 1900? Our entire understanding of the future depends on the answer to this question. It is clear, that attempts to preserve the rate of growth for the next hundred years will smash into the physical limitations of the planet.
Technology is frequently cited as the magical solution to square this circle. Yet, there has never been a major innovation that has shrunk humanities lust for resources.
Adapting to a world of limited growth will be the profound challenge of the next hundred years. The impacts will be both positive and negative, but will shake the very core beliefs of society. This post is the first in a series that I will publish laying out the implications of a limited growth world on our expectations.
By Bron Suchecki, on July 10th, 2009
I’ve never really got why a gradual deflationary bias was a problem. Consumers know, for example, that just about any electronic good (computers, plasma screens etc) will get cheaper in the future, yet this does not seem to stop them from being made and bought. The fact that only those people who really really want the good will buy it and those are no so enthused will wait until it gets cheaper does not seem to stop business from making money.
If it was conspicuous consumption fueled by debt (and an inflationary bias) that got us into this mess, then would not a system with a deflationary bias be the solution? It has a built in frugality: your money will have more purchasing power in the future, so only buy today what you actually need. People would also only want to take on debt if they were actually going to be productive/efficient rather than just trying to bubble up asset prices. Now maybe if we can convince Greenies that a Gold Standard would work against consumerism and thus be good for the planet, we’ve got a chance.
The above thoughts were prompted by these comments left at this article Gold Standard … Debunked or Another Bubble?:
Dirk, on November 24, 2008 at 12:58 pm, said:
I’m happy someone gets it- that constraining global economic activity based on a single metal that doesn’t really correlate to economic activity makes no sense.
Clearly, the gold standard is deflationary in absence of either major gold finds, or major negative economic shocks. More goods and services chasing a fixed money pool will create massive downward pressure on prices. And downward pressure on prices and assets equals lower incentives for investment, more difficulty paying off debt, and a negative wealth effect that creates real economic stagnation.
Inflation, on the other hand, creates pressure to invest money- not hoard it. As long as a currency promises a future redemptive power, it will keep its value. Perhaps fixing currency values to a “total energy” metric- the sum of all oil, coal, gas, solar, nuclear, etc. reserves- would allow for both economic growth and a guarantee of some future redemptive power for something really useful.
16 Stanley Pinchak, on November 25, 2008 at 2:03 pm, said:
Wow so much muddled thinking in one place. It is amazing that my browser didn’t pop up a warning.
1) Any stock of money sufficient to be accepted by the public as a money and selected as the medium of exchange is capable of serving as money. There is no need to grow the stock of money. Despite this false criticism, the gold stock does grow at a predictable (by mining engineers) and low rate between 1% and 3% per year.
2) The purchasing power of a money is related to the stock of money and the demand for money. Its purchasing power is also related to the supply and demand for all other goods in society for which it is exchanged. Thus as productivity increases, the purchasing power of a stable or slowly increasing money will increase. This has the effect of making daily expenses of those with debts easier to bear.
The only time a debt would become harder to pay off would be if the debtor was in a field of employment where his pay decreased in line with the increase in purchasing power of money. This might be a possibility, but at the same time that human actors today judge their debt burdens based on future expectations of income, those operating under a regime of increasing purchasing power of money would be capable of determining their expected future debt load capabilities. Those who guess wrong in such a situation are no different than those who bite off more debt than they can chew under our inflationary regime.
The biggest improvement that increasing purchasing power has is for savers and those on fixed incomes. Savers would earn interest + the difference in purchasing power between when they started saving and when they start consuming. This is the opposite of today where the difference in purchasing power subtracts from the interest and reduces the incentive to save. This will have the effect of greatly encouraging saving and the stock of loanable funds, driving interest rates to natural and sustainable low levels. This will benefit the saver/consumer in the future as well as the entrepreneur and the durable good consumer in the present.
Inflation on the other hand encourages debt based financing. It favors instant gratification, but since there are fewer savers since debt is the preferred method of financing, the purchases of today are not sustainable. The increase in consumption fueled by new money is not fully offset by the preferences of a ever shrinking class of savers who abstain from present consumption. This results in a business cycle like we see continuously under a system of bank credit expansion (ex nihlo). Inflation encourages capital consumption and not investment as Dirk claims. Empirical evidence of this is present in the dilapidated factories and rotting machinery of the American Rust Belt.
3) All business cycles (as in repeated and not caused by something like war or famine) are the result of fractional reserve banking and its concomitant ex nihlo credit expansion. There can be no stable and sustained economic growth under a fractional reserve banking regime. There will always be over-expansion combined with malinvestment, and and then retrenchment as the bad investments are liquidated. Attempting to tie a money to a commodity standard while maintaining a fractional reserve banking system is unsustainable. There will inevitably be calls for the creation of a central bank and lender of last resort as the bust causes bank runs.
The only viable solution is to realize that fractional reserve banking on demand deposit money is clearly a case of conflicting views of a contract and thus an untenable and invalid contract. How can a depositor demand a physical object which the banker (rightly?) assumes is lent to him for his purposes. A physical object must have a clear owner and can not be subject to control simultaneously by two parties of differing opinion under which direction to place the object. Thus demand deposits must be maintained in a warehouse fashion with 100% reserve maintained at all time. This eliminates the possibility of a bank run (in the historical sense and in the practical sense of potential damage to the depositor). Furthermore by limiting bank loans to funds deposited in time accounts (i.e. true saving) there will cease to be a business cycle.
4) The idea of a world central bank is superfluous with a free monetary system and 100% reserve banking. The main purposes of the central bank are to ease governmental expansion and to act as a lender of last resort. A world central bank will only lead to world bureaucracy. If banking is on a firm economic and legal foundation, there is no need for a lender of last resort. A world central bank is only an excuse for the establishment of world government. It can not prevent world wide business cycles while maintaining a fractional reserve banking system. Furthermore, if it maintained a 100% reserve banking system, it would still be subject to political considerations in open market operation and would still cause misallocations of resources, though not of the intertemporal kind as explained by the business cycle theory. The misallocations would result in privileged borrowers being able to bid resources from those who obtain the increase in the money supply last.
5) The myth that a gold standard would limit growth is preposterous. One of the greatest periods of economic (and population) expansion was obtained under a gold standard and under a period of increasing purchasing power of money (Cf. the 19th century). There is no theoretical nor physical restriction on the growth of economy based on a sound monetary system besides the subjective actions of individuals to save which allows for the implementation of longer and more productive production techniques.
The claim that unemployment is higher under a gold standard is also ridiculous. All non voluntary unemployment is the result of artificial restrictions on the movement of labor or its price. One must be careful not to make the mistake of comparing the unemployment rates of a central bank and fractional reserve banking boom period to an average or bust phase unemployment rate under the fractional reserve banking system which has persisted in the United States prior to its inception. Under a free market, all labor wishing to be employed will be. All state intervention attempting to reduce the ranks of the unemployed can only be obtained by reducing the well being of other actors in the economy. As such interventionist attempts to reduce unemployment, though they may increase productivity (doubtful), will not be optimal as compared ex ante in terms of the satisfaction of wants of all economic actors. On utilitarian and natural rights grounds, state intervention in the labor market is counterproductive, misguided, and should be avoided.
6) The idea that there is not enough gold to back all of the fiat currencies of the world is the most foolish statement of all. Logically one can take the stock of gold available and divide it by the weighted sum (by exchange rate) of the currencies of the world. This could provide backing for every single dollar, ruble, yen, etc. However, this is a bad policy, for the market should be left free to choose its own money, it should not be instituted from on high via state decree or central bank policy.
All that needs to be done is to eliminate legal tender laws and taxes on market selected monies. Since we have several thousand years of history showing that Gold and Silver are typically selected as money, we should start by eliminating taxes on them. If there is a push for a different medium of exchange, it should be treated in the same fashion. At the same time, all fractional reserve demand deposit banking must be subjected to traditional legal principles regarding property rights.
This means a reversion to 100% reserve banking. From these two changes, the market will perform the transition to a sound money with the minimum disruption and transfer cost. A state imposed system can only result in higher costs, as well as a retention of particular privileges for the state, most commonly in the form of a central bank, liable to interfere in the money supply through open market operations and subject to the political whims of demagogues.
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By David Barr, on May 7th, 2009
I have been thinking a lot about the meaning of saving money. Which brings me to what I call the fundamental question of finance: How does forgoing consumption today translate to increased consumption in the future?
In thinking about this question I have identified six distinct answers to this question:
The dog: Place a bowl of food in front of a hungry dog and it will devour it without hesitation, lick the bowl clean and then look around for more. The dog’s world represents the very simplest economic system. What you have now is what you consume now. If there is plenty today the dog will eat itself sick. If there is no food tomorrow he will go hungry.
The squirrel: Before the first human walked the earth, animals such as squirrels discovered the first financial innovation. Just as the squirrel gathers nuts to get through the long winter, there are some goods that we can simply store and use in their current form. This is the simple and most obvious answer to the question listed above. For many people this is as far as they get when thinking about savings. However, money is not a can of beans. Simply storing money today does not automatically translate to purchasing power in the future.
The farmer: Around 10000 years ago humans discovered that seeds left in the ground would grow into new plants. Thus the birth of agriculture also represented the first investments. By not consuming some grain today, early farmers could ensure a reliable supply in the future. Many natural and living things allow this sort of simple investment. We now know that by not clear cutting a forest or fishing a species to extinction we can ensure an adequate supply for the future.
The builder: Some projects take a lot of time and effort before they yield any value. 10 people might have to work for half a year to build a house. Bigger projects like highways and dams can occupy hundreds or thousands of people for years. Of course all of those people need food, shelter and all the other necessities of life. Which brings us to the fourth answer to our big question. When I consume less then I produce, my surplus can sustain those who are working on larger projects. In exchange, I expect to receive some of the benefit of the completed project.
The parent: Over the course of ones life ones needs and abilities change. A new born infant is completely helpless to meet its basic needs. By providing for young children during their peak production years, the parent can count on their children to sustain them as they age. This familial relationship has been a cornerstone of nearly every society in human history. In modern societies this function is often aggregated, in that governments invests in education for children and pensions and medical care for the elderly. The logic is basically the same, individuals in their prime working years consume less then they produce, while the surplus goes to supporting children and the elderly.
The creator: The greatest achievements often require years of effort with only a small possibility of creating anything of value. Great works of literature, billion dollar corporations and medical breakthroughs all follow this pattern. An individual researcher may toil for 20 years with no tangible results before a discovery that creates millions of dollars of value. The artists, entrepreneurs, scientists and writers depend on the savings of the general population to support them in their efforts.
The financial sector is responsible for taking the excess production of today and using it to meet the needs of the future. Some goods can be stored for the future, but the vast majority of the production is services or perishable goods that cannot be stored. Forsaking consumption today does not guarantee that there will be plenty tomorrow.
By Cheryl Grey, on November 4th, 2008
Earlier this year it seemed the United States would skirt recession or at worst find a shallow bottom and recover handily in the early part of 2009. However, there’s been a dramatic shift in circumstances in the intervening months, and this is no longer a matter of skinny dipping. After the impact of the credit crunch on the “real” economy, the U.S. is heading for a chunky dunk, similar to the 1981–82 recession and bypassing the lesser ones in between.
The classical definition of a recession is two consecutive quarters of negative GDP growth (an economy that is shrinking rather than expanding). Going by this definition, New Zealand was the first developed nation to qualify. The Eurozone and the United Kingdom are halfway there, while Canada, for the most part still going strong, is nevertheless flirting with recession due to its deeply intertwined trade relationship with the U.S.
The major scorecard between all national economies remains the gross domestic product, or GDP, which is the measure of all goods and services produced within each country. In the first quarter of this year, the U.S. GDP printed at 0.9%, meaning that the economy as a whole was that percentage larger in the first quarter of 2008 than it was in the fourth quarter of 2007. In the second quarter, it rose to an astonishing 2.8%—but it’s important to understand that most of that expansion was the direct result of heavy exports, as America’s trading partners around the world had not yet come under the influence of our financial woes.
GDP in 2008
Only in the third quarter of this year has U.S. GDP fallen into negative territory. The first estimate, released last week, printed at 0.3%, which actually wasn’t as bad as most economists expected. However, going by the classical definition of a recession, we’re halfway there and nobody looking at the current situation doubts that we’ll take the next step in the fourth quarter. Just for the record, it’s also expected the first quarter of 2009 will continue this contractionary trend.
The underlying fundamental data to this negative GDP growth include industrial production, which rolled off a cliff in the third quarter as several hurricanes, a strike at Boeing and especially the credit crunch hit. With major corporations around the nation denied access to credit, not only from banks but also from the commercial paper market, plans for corporate expansion evaporated. No new divisions were opened, no new jobs created and no new output processed. Instead, corporations which were actively losing wealth through stock market fluctuations had no alternative but to retrench, cutting some of their established jobs and slicing their output to prevent being stuck with large amounts of inventory that no one wanted to buy.
The Purchasing Manger’s Index
A forward-looking indicator, the Purchasing Managers’ Index, or PMI, surveys the people who purchase wholesale inputs for corporations to measure what and how much they’re buying. This gives an indication, not of where U.S. companies have been, but of where they intend to go, which gives economists an idea of national economic health in the near future. In September, the latest month for which data is available, the manufacturing PMI also fell off that economic cliff, printing at 43.5 with 50 marking the break-even point and 49.9 being the level for August. That’s the lowest PMI since 2001—the last U.S. recession.
All of this shrinking corporate activity will, of course, lead to higher unemployment as jobs are cut and few new positions are created. As families also retrench, more people will need jobs, thus swelling the ranks of job-market participants and therefore the unemployment rate. Currently that stands at 6.1%, 1.4% higher and with 2.2 million more people out of work than this time last year.
The circle of economic stagnation is completed as lower personal income leads to lower consumption, with businesses selling less and earning lower profits as individuals purchase less to make what funds they have go further. The only potentially bright spot in this gloomy picture is that lower demand generally leads to lower inflation, although as our current spate of higher prices is linked to higher commodities rather than surging demand, that is not a given. If commodities prices, particularly crude oil, rise again, then inflation could remain high, as well.
By James Ratcliff, on July 17th, 2008
I was living in Mexico in the mid-1980s when I decided to get serious about my health and fitness. I began by sponsoring a basketball team in a city league in Merida, Yucatan.
Running the court with kids half my age helped to get me in the best physical condition of my life. Paying for uniforms and post-game snacks out of my own pocket made it an expensive way to do aerobics, but the benefits were well worth the cost.
As a “thirty-something” in a league of athletic twenty-year-olds, it got harder for me to keep up with the competition as the season wore on. When I retired from the city league, I based my decision more on a desire to preserve my knees than on a need to cut down on my leisure expenditures.
Jogging offered a less punishing way to stay fit. After training for two years, I completed a marathon. I joined a tennis club after that, where I took lessons with a young man who had played in the U.S. Open Junior Championship in Forest Hills, New York.
Although every hour with my coach did wonders for my game, I soon stopped taking lessons and gave up my club membership. I was juggling too many commitments in my professional and personal life to enjoy what little time I spent on the tennis court. Squeezing trips to the club into an already hectic schedule was wearing me out.
It was time for a serious lifestyle assessment. I was living in a part of the world where the tempo was slow, at least in comparison with the pace of life in my native United States. But I couldn’t hide from the truth any longer. I had become a member of “the harried leisure class.”
The phrase is from The Harried Leisure Class, a little-known book by Swedish economist Staffan Linder who taught at Yale and Columbia.
As Geoffrey Godbey pointed out in a 2003 review in the Journal of Leisure Research, “Linder was perhaps the first economist to understand and predict the frantic pace of modern life and leisure.” Long before I overloaded my life with increasingly frantic leisure activities, Linder saw the warning signs on the horizon.
How Are We Doing Today?
“Wealth is evidently not the good we are seeking; for it is merely useful and for the sake of something else,” Aristotle wrote in Nicomachean Ethics. How are we doing today by Aristotle’s standards?
Not well, said Linder. As Geoffrey Godbey noted, the main message of The Harried Leisure Class is that “the pace of life has sped up and has caused the ways in which leisure is used to change.”
Since the end of World War II, futurists have predicted that people will have more goods to enjoy and more time to enjoy them. But where is the surplus of time that all the futurists have been predicting? Linder pointed out an obvious fact that most economists continue to overlook today: it takes time to consume goods, and people have limited time.
According to Linder, “Consumption is being accelerated to increase the yield on time devoted to consumption.” The “increased goods intensity” of leisure activities leads people to desire “ever-larger sets of commodities.” As a result, satisfaction becomes increasingly elusive: what good is a lake without a pleasure craft?
Linder divided the economic process into three periods:
1. The constructive growth phase (the poor countries are still at the beginning of this period)
2. The period of decadence (economic improvement comes to be regarded as a goal in itself instead of as a means to a goal)
3. The phase of reformation (in which people reevaluate their goals and acquire new purposes)
In the third period—which may or may not come about—the level of human well-being can no longer be raised by raising the level of consumption. A century and a half ago, John Stuart Mill predicted that economic growth would not make people happier. Mill would have been saddened but by no means surprised by Linder’s findings.
The more we depend on consumption as a means of enhancing our leisure, the less we value pursuits that truly add value to life. The result is a society in which people only feel happy when they’re consuming something in the ill-fated attempt to squeeze more pleasure out of their free time.
Has Growth Become an End in Itself?
When I completed my first marathon, a good pair of running shoes accounted for the total “goods intensity” of my pastime. By joining a tennis club and taking private lessons with a local celebrity, I increased the apparent “yield” on my leisure consumption even as the enjoyment I derived from it diminished.
As I watched President Bush speak to the United States on July 15, I was reminded of an obvious fact: leaders of wealthy nations view growth as an end in itself, not as a means to “something else.” Staffan Linder was right. It’s likely that wealthy nations will continue to desire economic growth even when continued growth offers no further increase in well-being.
In my next article, I’ll take a closer look at the questions Linder raised in The Harried Leisure Class. In the meantime, I hope you’ll spend more of your own time thinking about the ultimate purpose of our economic growth.
Even if it means you’ll have less time to spend on the tennis court.
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