As any of you who are my consistent readers know, I think Paul Farrell over at Marketwatch.com is a hoot. His recent essay on the 13 tipping points that will lead to Great Depression II is a fun read.
When the economy was on the way up, up, up! we couldn’t get enough stories about how technology was going to change our lives for the better, and Utopia was finally just around the corner. Think of Francis Fukuyama’s neo-Hegelian “End of History” thesis, free market globalizers from Bill Clinton to George W. Bush, and lefty internet entrepreneurs who assured us hyperlinks would cure cancer. (Ok, I exaggerated that one a bit.) My favorite send up of this idealistic nonsense is from that gem of a movie Talladega Nights when Ricky Bobby (played by Will Farrell) is reprimanded by Lucius, his crew chief, for criminally reckless driving:
Lucius: Ricky Bobby! You can’t drive like that! You’re not going to live forever you know.
Ricky Bobby: I know. But with the way medical science is going, and my level of income … I figure three, four hundred years.
Why is this funny? Because it assumes you can be more clever than the world and bluster your way out of inconvenient truths, like the fact of human mortality. (In a fake commercial at the end of the movie Ricky Bobby says, “98% of people will die. Will it be you?”) But let’s face it kids, nothing lasts forever, and the number one cause of death is birth. For the last sixty years we (I mean the Boomers, the Xers and everyone born since the beginning of Reagan’s second term) have assumed that we were exceptional, different, exempt from the rules of human life. We assumed there was no problem we couldn’t solve, and the future was so bright we had to wear shades. There is even a scientific rationale for this euphoria with its own Wikipedia page. The truth is our existence is cyclical. Global warming notwithstanding, we have seasons of the year; we have seasons of our lives; and even civilizations have their cycles of growth, maturity, decline, and death. So why should business and economics be any different? The business cycle reflects the human cycle, period.
But what about growth? I find it hilarious that classical economists of the most recent incarnation (putitively “liberal” guys like Larry Summers and Jeffrey Sachs as well as the Chicago School Boys) have no problem with the ancient economic truism that we live in a world of limited natural resources, who nevertheless continue to promote the idea that growth is the goal of macroeconomics. The Wall Street Journal ran an interestingly anxious article on Malthus a year ago that was one of, I think, the first tremors of doubt about the possiblitiy of the unlimited power of growth. True to form, they derided the economic pessimists as “Cassandras,” but they also gave space to the idea that it might not be possible to have your cake and eat it too. Paul Krugman points out on his blog that Cassandra wasn’t a paranoid, doomsday-obsessed freakazoid, but that she was right and no one would believe her.
Was Malthus wrong? In one obvious sense, yes. He didn’t anticipate the industrial/scientific revolution and its impact on human’s capacity for production. He thought overpopulation was just around the corner, and instead the human population exploded. But in another sense what the sour parson brought to the discussion of economics was right on: over production leads to over consumption, and that, in turn, leads to contraction. That goes for families having four kids as well as families buying a giant house they can’t afford.
I am not foolish enough (yet) to get hysterical over overpopulation (as Paul Farrell occassionally does) and assert that a contraction in the recent half-century long economic bubble will result in a “contraction” of the population bubble, though it might be worthwhile for the implications of such a contraction to sink into the general public’s consciousness. If world population “shrank” 10% to match the average decline in world GDP seven hundred million (700,000,000) people would have to die prematurely from disease, starvation, and war. That’s more than twice the total population of the United States. Hopefully this doomsday scenario won’t happen. But it is time to get realistic about what is going to happen.
This post is typical of bad habits in economic thought that brought us to this pass by promoting foolish government policy. Technical analysis of markets makes two fatal assumptions: first, that market psychology is self-contained, and second that it is quantifiable. In the first place, markets like to produce their own reality, as the evidence of every bubble shows, even though reality sometimes operates on its own outside of the market. The Chicago School’s efficient market theory was always wishful thinking, the proof of which we are now witnessing. Markets do not want to show the actual price of a commodity, but that fact is obscured because markets do want to manipulate information so that it appears all parties come out with more than they brought. Call it the illusion of wealth creation. If one party in a market transaction is trying to fleece another party, the market works well to bring down prices by offering competitive lower prices by a rival party. But if all parties seem to be winnng, the market will quietly and without fanfare allow all prices to increase. Inflation is the obvious symptom of this process.
Of course, markets work the other way too. If everyone in a market has decided that commodity values are inflated a commodity will lose value whether or not it can do the same work at $1 that it did for $100. Take a plow as an example. You know that with a plow you can reap a staple of human life for decades. Over time $100 investment in a plow will be repaid through market contractions and expansions. But the market only thinks in the short term, and if it seems no one is going to be able to afford wheat for seven years, the plow is worse than useless at $100 because that money could be spent on grain to hoard in your silo. Suddenly nothing is worth what it once was, and deflation is the trend.
Markets only think in the short term, and because economists have been obsessed with markets, they too only think in the short term. Let me offer another way to put this thought: the boom in production since Malthus lived in the 18th century is not a “game changing” structural given. It is simply a boom, one that requires the continued faith of all the participants (in the world) to be maintained. (To truly change the game we have to change two foundational facts of our existence — our need to produce energy through burning stuff, and our irrational faith in technology.)
But I have wandered far from my original question: Will this contraction be worse than the Great Depression? From the perspective of human history, the answer is a definite maybe. Growth is not a fact, it’s an attitude; and growth of the kind we have experienced for the last two hundred years will end unless we find a way to grow off planet earth. This could be the historical point where we slide back down the hill to the “sustainable” economies of the middle ages. But bubbles need time to unwind, and a two hundred year bubble will take at least half that long to correct itself. That means losing 700,000,000 human lives won’t be as painful as it sounds. Moreover, it just may be possible with the right vision and leadership to truly innovate our way off this planet and produce the real structural change that will allow us to maintain human populations in the tens of billions. But that will mean scrapping all carbon burning technologies and rethinking a facile economics that indulges our fantasies of growth instead of instructing us to walk in the ways of wisdom.