A Swiss news magazine recently published a story about an international trading house that was doing comparatively well in this depression, thanks to a mixture of sound financial policies, solid product and services footing and conservative, sensible management. While the name and nature of the group were forgettable, the thing that stuck with me was the slogan some of their managers came up with at a planning outing — “we refuse to take part in the downturn.”
I understand the causes of this economic shit sandwich — despite the omnipresent howling about how nobody has a clue what happened, it’s pretty simple. Take a big pot, mix in excessive consumer debt from buying too much crap, complete lack of common sense in home values, reduction of financial transactions regulation, piss-poor shareholder representation rules in corporations, excessive labor bargaining power, short-sighted management incentive and bonus schemes, reduction of math and science competence in economically powerful countries, outsourcing of not just manufacturing but also innovation, refusal to enforce minimal environmental and labor standards globally for fear of losing cheap production, over-reliance on service industries, over-leveraging of financial institutions, and generally a lot of myopic greed and laziness, stir, let fester for a few years, add in some overpriced petroleum and a match, sit back and enjoy the fireworks.
I also understand that everyone, with few exceptions, is terrified, nearly catatonic at the miserable prospects facing the world of commerce and industry, with the catastrophic influences the draw-down in economic activity may potentially have on even better-seated individuals. Nonetheless, despite the benefit of a fairly sound educational footing in political science and economics, I fail to understand the panic and doomsaying.
Starting with the basics and working upwards, everyone must eat. Preferably, this goes hand in hand with such basic needs as shelter, warmth and clothing. So let’s say that Adam Smith was right, and letting a few people concentrate on producing the above will engender greater expertise on their part, economies of scale and thus generally higher efficiency and lower cost. Plus, everyone else can go about doing different things.
Those “different things” will include supporting the food-growers, house-builders, clothes-makers and fire-starters. Lugging sacks of dung (and making those sacks), creating tools, spinning yarn and collecting firewood are all supporting industries. Advancing a bit, we get transportation; consolidating production in fewer locations means lower incremental costs due to yet more efficiencies of scale. Resources have to be distributed to fewer locations, and the advances in manufacturing techniques and equipment required to allow larger production facilities will inevitably have knock-on effects elsewhere as technological innovation diffuses to different applications.
Each of these supporting industries in turn needs support, from the mechanics who fix trucks to the trainers who teach drivers their trade. Eventually we get to the point where barter is no longer a viable form of payment, so you have symbolic representations of the trust that someone else will redeem the representation for a good or service the recipient values similarly to what he gave away for it — money.
Keeping money around in liquid form is impractical, so you get banks. They keep money safe. Not just that, but businesses now have incentive to gamble on expansion, but they have to obtain all the stuff they need in order to build new facilities, hire people, buy resources. So they borrow money; banks lend to them, factoring the risk that the company may not succeed into the price of that money — loans and bonds. Furthermore, individuals look at new companies that want capital, and think, “hey, that’s a good idea, he’s going to make money but needs funding now, I have extra cash, I’ll buy into it.” And lo and behold, a stock market is born. People start gambling on their health, natural disasters and other possible failures, thus giving rise to insurance. They become willing to pay for professional advice to navigate all this information — thus stock- and insurance brokers.
This goes on and on and on. Each innovation brings with it the need to build and maintain other, new aspects of economic activity, which makes money go from point A to point B, thus fundamentally enriching society as a whole. And through it all, people need food, shelter, warmth and clothing.
Will someone please remind me why we are having a recession?