Economics is a complicated subject. The attempt by economists to put it in the form of equations has further complicated things for the simple minded like me. Having read (the summaries of) works of great economists like John Maynard Keynes, Milton Friedman and Paul Krugman, I can’t help but be impressed at the foresight of these people. No doubt that many of the thoughts put forth by such economist have averted major crisis the world over, time and again.
But for a change, I thought, why not take a simplistic view of the whole thing. Combine the simple thought processes with the theories and knowledge of economics and try to look at the present economic conditions. Many of the points may be simple facts that we may have forgotten in the barrage of jargons.
The Premise
What is the aim of all theories in economics?
The aim is sustained economic activity and growth, a natural rate of employment, contained inflation etc. In short, economics aims at overall well being of humanity.
What does the money spent represent?
It represents the use of limited resources of the world. Mostly it represents use of human efforts, fuel and energy lost forever.
Keynes vs. Friedman
John Maynard Keynes suggested government impetus while Milton Friedman wanted free market economy. Disagreeing with neither Keynes nor Friedman, I believe free markets drive efficiency leading to progress while government regulations are required to ensure effective free market and play the saviour during troughs in the business cycles. So in combination, regulations to ensure fair play and efficient utilization of resources should lead to the said aim.
Where did we fail?
In recent times, the world has failed on both accounts. And the epicentre of these mistakes was the US and other developed nations on most counts.
Immediate precursors
Crisis of 2008
In some way it was the lack of regulations which lead to the events of 2008. In the upheaval, some capitalized on the crest in 2007 while many got stuck in the trough of 2008. Wealth was neither created nor destroyed. It was simply transferred from one hand to another. Keynesian economics followed with great investments by government leading to huge unmanageable debts.
War against terror
A report in June estimated that the American cost of the war at 3.2 to 4 trillion USD. The US government debt stands at a little less than 15 trillion USD. To put things in perspective, world’s GDP is 58.26 trillion. So by conservative estimates 20% of the debt money was used not for development but for destruction albeit in a different country. Let’s not forget that US is not the only country who incurred expenses in the war. So the overall cost of war is much more for the world, though US was the major spender.
Use of such valuable resources and in such huge amounts for the purpose of destroying more resources and properties is what it means to a simple mind. I am not even counting the lives lost in the whole war! The US was foolish enough to follow Afghanistan with Iraq, and the world was timid enough to watch. Power flew from the barrel of the gun and bodies such as UN yet again proved their worthlessness.
This single event was a failure on both counts of resource utilization and international regulations.
Long term Issues leading to the day
The problem may not just be episodic. Just as World War I was not just caused by the assassination of the Archduke of Austria alone but a series of factors, the present economic war is a manifestation of systemic decisions taken by the societies of the world over time.
Supply vs. Demand – a really macro view
Here the demand signifies what the entire human population requires while the supply signifies what this world can offer. The world today carries around 7 billion people and it has a limited set of resources such as fuel and metals. With limited supply and increasing demand, the cost of living is bound to increase.
Consumerism
Consumer demand is essential to keep the economy alive. But how do you know when it is overdone? Take for example the consumption of energy. The per capita consumption of electricity in US is 1460 watts/ year while India stands at 50.5 watts/year. With the power cuts in India, people know that our consumption supply is less than optimal. But how do we tell if 1460 is too big a figure or not? The western world has indulged in excessive splurging for almost a century. It part of the reason of their growing economies. But it somehow doesn’t feel right from this simplistic framework of ours. It makes me wonder whether the west is in a way splurging at the expense of others.
GDP growth as a parameter
GDP of the world (in real terms) is constantly increasing. It has to, with the increasing population of the world. GDP growth is seen as a success parameter for nations. But ideally, we would want to have a situation such as Japan. Its economy is in constant recession. With lesser population, they need lesser goods to be produced. Even if the population were to stabilize, reduction in GDP of the world should be the aim as increased efficiencies should lead to lesser costs and prices for the same or even improved products.
Rich-poor divide
More than growth what we require is equitable distribution of what is already available. The topic of inequitable distribution finds place in political discussion (with little actual effect) but rarely in economic ones. A success of the economy is determined by the status of the bottom of the pyramid rather than the top. However, the capitalist philosophy been followed the world over has done little to solve the problem. The trickle down effect is hardly seen. Socialism on the other hand, drives down efficiencies and just makes everyone poorer.
Conclusion
While the economists take care of our business cycles, it is these simple fundamentals discussed that will drive our economies in the long term. There is no simple answer to the complex problems. We need a series of great minds to focus on these issues and show us a way. If we focus our attention on just the short term economics, then as Keynes said, we may actually be all dead in the long term.
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