European-American Life

Thursday, June 12, 2014

FURTHER RUMINATIONS ABOUT THE ECONOMIC CRISIS

By Tom Kando

(originally written and posted on 12/8/08)

Today, two random thoughts about the economic crisis:

1) My first thought isn’t very original. I’ve heard many people talk this way for a long time. I just want to articulate it:

The current crisis, epicentered in the US but affecting the whole world, is universally defined - at least by economists - as a lack of consumption. The credit markets are frozen, there is no lending going on, people aren’t spending (enough) any more, hence people are losing their jobs and everything is grinding to a halt.This view is practically consensual, almost common-sensical. It is shared by “liberal” economists such as Nobel Prize winner Paul Krugman and Pulitzer Prize winning author Thomas Friedman. (I keep confusing these two guys, as both are regular New York Times columnists).
Both the lame-duck Republican administration (Paulsen, Bush) and the incoming Obama administration also agree - at least about the ends, if not the means: stimulate, stimulate, stimulate. While the fat cats want to “stimulate” banks, Obama wants to stimulate the people, through public works, etc. Both agree that there needs to be more money in circulation, more money spent.
In sum, Capitalism reigns supreme - at least the Keynesian variety, which says that you revive the economy by pumping money into the consumer sector (or something like that, if I remember Robert Heilbroner correctly) So, whether you go “demand” side, as the Keynesians want, or supply side, as the discredited Reaganites prefer, they both agree that the economy must resume growing. I suppose most economists would agree that for mature economies such as America and Europe, it would be healthy to return to a growth rate of, say, 3% or 4% (For countries such as China and India, it’s a different matter. Economists expect such countries to continue to grow at rates around 10%).

* * * * *

But there is another view: Why must economies keep growing? In time, shouldn’t they flatten out, as they indeed have begun to do in places like Switzerland and Denmark, i.e. in a few very rich, advanced, small, clean and environmentally sound countries? There, annual population growth is zero, and annual GDP growth is barely more. Isn’t that just fine?

Shouldn’t we consume less rather than more, at least those of us who are already living in opulence, who eat too much, drive around too much, live in houses that are too large?
Granted, there are major economic needs left to fill, and not just in the Third World. America’s infrastructure is abominable, as is its health care system, and growing segments of its educational system. Switching to wind power, battery-powered cars, mass public transit, completing the shift to electronic communication, there are trillions of dollars to be spent on all these things, and dozens of millions of jobs to be created.
Everyone who so desires should be able to buy and live in a nice (little) house. Great. People should also eat a lot healthier than they do, and this, too, might be more expensive.
So I am not suggesting that we should crawl back into caves. But one thing we should reduce is the production and purchase of garbage, i.e. plastic and metal things which are often useless, needless and environmentally destructive.
You don’t have to be a hippie to believe this way. For years there has been a simplicity movement which advocates precisely this. True, some of what these people say may be extreme. They claim that a couple could get by on less than $10,000 a year, buying food through coops, being frugal in all sorts of ways. I’d like to split the difference. Personally, I might find it a bit hard to live on $5000 a year. After all, I am used to a fairly comfortable middle-class lifestyle which requires considerably more money than that. However, the simplicity movement’s main point remains valid.
The point, then, is obvious: granted that there are crying inequities and economic needs, that these are being aggravated by the current economic crisis, and granted that America and the world must overcome this crisis, there is nevertheless a silver lining: Hopefully, we will learn to live within our means, maybe save a little again instead of spending ourselves gaga, and above all, learn to consume less rather than always wanting more.

* * * * *

2) My second thought for the day is about value: As a non-economist, I am also struck by another consensus among economists: Namely that value is determined only by supply and demand, and by nothing else. Adam Smith, right?
Let me first admit right away that this idea makes a lot of sense. Of course. Only a fool would deny it. For example, gold is precious, right? But if the entire Rocky Mountains were made of gold, then only very young children and idiots would invest in gold, which would have less value than manure.
However: Take the housing market. Four years ago, my house was worth, say, $800,000. Now, it’s down to half that, and we all know why. Adam Smith would explain it properly.
Now take this one step further: had the housing market been even crazier a few years ago, my house could have gone up to, say, $5,000,000. And by the same token, were the housing market to deteriorate even more, by next year my house’s value could decline to $1000. In fact, there is plenty of real property which cannot be sold at any price, i.e. whose value is negative.

But does this make sense? I remember vaguely learning in some of my grad school courses in economics about other theories of value. For example, there is Marx’s Labor Theory of Value. I suppose Marx felt that the value of something is (at least in part) determined by the cost of the labor which goes into producing it. I am sure this theory is now discredited, and I certainly do not propose to defend it.
However: I just throw this out as an example to show that there may be alternatives to the theory which currently reigns supreme, namely the supply-and-demand theory.
Think again of the value of a house - mine, or any other. Now granted that some real estate may have negative value. There may be houses or apartments so dilapidated, so badly located in, say, a crime-infested area, that no one would want to touch them with a ten-foot pole. But what about a fine house in a fine area, fit for a family to live in comfortably? What if market forces were to reduce its “value” to $1000? Surely this would not be rational, would it?

In sum, here is the counter-intuitive thought I am suggesting: the cliché is that, in human society, everything is “in the eyes of the beholder.” In other words, no object’s meaning or value is “inherent,” “absolute,” “God-given” if you will. The value of a house, or of a Van Gogh painting, or of a piece of jewelry, or of a piece of bread, is determined by its scarcity and its (perceived) use to us.
But maybe this is not the be-all and end-all of all sociological and economic wisdom. Maybe the idea of “intrinsic,” or “inherent” value is worth exploring. I am sure economists and philosophers have done so.


© Tom Kando 2014
 
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9 comments:

  1. Tom,
    I don't think the problem is growth so much as it is reliance on growth. Reliance on growth is known by a less admirable name: a ponzi scheme.

    The current scheme relies on an endless sea of consumers, but those consumers themselves have to have money to consume. In order to have money, they need to be producers. However, production has been consolidated and made more efficient, eliminating many traditional producers, and as a result consumer power.

    The current crisis is triggered by a system that depends on lending growth, while the ability to borrow is shrinking.

    The law of supply and demand wins, not because it determines intrinsic value, but because it prevents ponzi schemes from working. It is analagous to laws of physics preventing perpetual motion machines.
    December 10, 2008

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  2. yes i agree, consume less!
    Dec. 10, 2008

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  3. Tom
    Denmark and Switzerland?? Those are your models for a no growth utopia? Two static societies populated with cyphers, home of a few bobsledders, watchmakers, bankers, and Hans Christian Anderson readers. Jezuz, Tom, have you flatlined, are you ready to move into the nursing home already?
    No growth won't work in the US, because we are a vital, dynamic society with unlimited hopes and dreams. We need a growing pie, because there are enough bastards like me in this country that won't accept less - no growth means more conflict between the haves and have nots.
    December 10, 2008

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  4. Gordon's comment is valuable. "Ponzi" is a good word. Another similar word is "pyaramid."
    So pain is sometimes part of the necessary process. The law of supply and demand provides a wholesome corrective.

    In "Capitalism, Socialism and Democracy," Joseph Schumpter coined the idea of "creative destruction," which is at the heart of Capitalism.
    Alan Greenspan loves to quote that idea, which he does frequently in his recent book "The Age of Turbulence."
    Dec. 10, '08

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  5. Neither Greenspan nor his latest book are very popular these days (the book sells for a couple of bucks at Border's). But it is difficult to dismiss these brilliant economists just because of the current turn of events (a once-in-a-century economic Tsunami)...
    December 11, 2008

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  6. Brian,
    Regarding economic growth, quality of life, and my choice of examples(Switzerland, Denmark):
    Sure, America is great, dynamic, still growing. That's fine.
    But you should really check out those little countries over there some time. Maybe go on a cruise down the Rhine or something. Things are real nice there, trust me.
    Don't you like bobsledding?
    December 11, 2008

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  7. Tom
    I came from a moribund static socialistic society, 1950's England, I don't want any part of it.
    Brian
    December 11, 2008

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  8. Hate to always post critical remarks, but I think you should keep away from quantitative matters/economics. You propose an 'intrinsic' definition of worth without any details or examples. Meanwhile you attack a 'straw house' argument about the 'value' of your home being $1000. I am also not an economist, but I would venture to suggest that supply and demand determine *price*, and I see nothing in last year's events to contradict that. I suggest that your conception of your home's *value*, intrinsic or otherwise, is more a matter for sociology, psychology, or philosophy than for economics.
    January 6, 2009

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  9. You make several good points:
    1) We don’t know what we’re talking about. We’re like two blind men arguing over the color of air. But it’s fun.
    2) The value of my home is not only determined by economic (market) forces.
    3) I am probably talking social psychology and philosophy, more than economics.

    I have no idea what determines value. However, the idea of intrinsic value is not mine. It goes as far back as Plato, in philosophy and in economics. It refers to something “worth having for itself,” which may differ from market value.(See for example Wall Street Words, David Scott, Houghton Mifflin, 2003). One can even talk about a company’s intrinsic value. Intrinsic value can refer to the cost of producing something. I did mention an example of an intrinsic value theory in my post - Marx’s labor theory of value.
    I don’t believe that any subject is owned by a single discipline. Disciplinary boundaries are arbitrary. I can no more refrain from dabbling in economics than economists can exclude philosophers and social psychologists from discussing a topic like “value.” All these disciplines have a lot to say about value and worth.
    January 7, 2009

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