Why No One Can Figure Out the Economy
MAKING ends meet is not as easy as it once was. A housewife spends more money at the market for fewer groceries. Her husband makes higher wages than ever but has less to show for it. Will things get better?
The economy of the Western non-Communist world in particular has prompted predictions of national and international monetary collapse. In peculiar contrast, other experts say that the current economic plight is only a phase the economy is passing through as it adjusts to profound new influences. Soon, they prophesy, it will again vigorously move ahead.
Who is right? More than a few experts take a careful middle-of-the-road position. Business Week magazine, in a largely gloomy special issue about the U.S. “Debt Economy,” says that “the nation’s burden of debt is like a string drawn very taut . . . The string has not broken, and it may not. . . . Yet no one knows the precise breaking point and, while there are schemes and theories galore, no one really knows how to ease the tension, either.”
But why is it that the economic future is so hard to figure out? Why is it that you cannot be sure how much your money will buy tomorrow—if anything? Some background in elementary economics is of assistance.
Economics Is a System
In its simplest definition, economics has reference to how goods and services are produced and distributed. The study of economics, then, is the study of a system.
In virtually every society people need things that other people have. One man, A, has sheep, which produce wool; another man, B, possesses dyes. If each is willing, they simply swap or barter goods. A gets dyes and B gets wool. Economics is essentially a system of cooperative swapping.
But suppose that A wants dyes from B and yet B already has an ample supply of A’s wool. Then what does A do? Or, what if both need the weaving service offered by a third, C? How should C be compensated? An economic system has to be big enough to handle these slightly more complex arrangements. How?
Money is used. Money—that is, currency—stands for or represents something of value; it is an instrument that allows great flexibility in a system of exchanges. Money, of course, should not be confused with true wealth. What A has of real value is his sheep. Meanwhile, B and C have dyes and a skill, respectively, as things of genuine worth. The money thus stands for what each has of true value.
But what is it that makes each one’s product or service of value? The demand for it. If no one ever needed wool, the value would remain low. On the other hand, if everyone depended on wool for clothing, that product would be in great demand and thus of high value.
The so-called “classical economists,” such as the Scotsman Adam Smith who lived in the eighteenth century, advised that an economic system should be allowed to float freely and, like water, seek its own level. Supply and demand would determine the “level” of each product or service. Thus if one man or company produces a product or service more cheaply than another, his competitor will eventually be driven from business by the public demand.
Prices, too, would be set by demand. When demand is high and supply limited, prices are high. But when little demand exists for an item available in great abundance, prices are low. This constitutes the rudiments of a “free” economic system. Unobstructed, many have reasoned, this system would continue indefinitely.
But a warning is in order here. Just because a system has been devised this does not mean that it is a “good” one.
How “Good” Is the Economic System?
Measured by certain standards, the Western world’s economic system may appear to be very effective. But is it really proving to be a “good” one? Or will it eventually be shown up as largely self-defeating? Let us see.
Particularly in recent decades experts have applied more controls to the economy. Why? If the economic system really works with supply and demand setting prices, why try to manipulate it? Many reasons are offered, but there are essentially two factors.
For one thing, there is fear—a desire to “protect” one segment of an economy. A man, a company, a class of workers or a whole nation all know that if they lose out to their competition they have no work.
They may know economic “theory” very well. They know that public demand has made their service or product unnecessary and that they should merely be shifted to another part of the economy where they can play a productive role, supplying what the public demands.
But they also know that this means radical changes for them personally. Suppose a man is older and has spent his entire lifetime learning a trade that is no longer in demand; should he suddenly be expected to learn something entirely different? And what about salary? Obviously a man shifted from a skilled position in a now-defunct business will not make as much money when put on a job at which he is untrained. This means, in turn, that his family will have less money to live on, and his standard of living must drop. And who wants that?
Yes, the theory of supply and demand, a free uncontrolled market, and so forth, may look good on charts when extended over generations or centuries of time. But it cannot help the man who loses his job today. Thus economic writer Henry Hazlitt observes:
“It was precisely the great merit of the classical economists . . . that they were concerned with the effects of a given economic policy or development in the long run and on the whole community.”
However, Hazlitt adds:
“But it was also their defect that, in taking the long view and the broad view, they sometimes neglected to take also the short view and the narrow view. They were too often inclined to minimize or to forget altogether the immediate effects of developments on special groups. . . . [This situation is] incident to nearly all industrial and economic progress.”
For this reason, most modern Western economists lean to the other extreme, and the “long run” effect of policies is forgotten as they call for jobs to be preserved at all costs. Let us consider a couple of admittedly simple illustrations.
Suppose a man’s wool suit can be made and sold for $80 in the U.S. Yet Hong Kong companies make the same suit and can ship it and sell it in the U.S. for $40. Many, if not all, customers would buy two Hong Kong suits for the price of one U.S. suit. If this is kept up, American suits would go out of demand and thousands of garment-industry workers would be left idle.
So a tariff is imposed on suits imported to the U.S., heavily taxing them. This greatly raises the cost of the foreign-made suits, and U.S. jobs are rescued. Superficially, that looks fine; but let us look below the surface.
What about the buyer? He is paying an additional $40 for a suit. That money could be spent in other sectors of the economy, on, say, television sets and refrigerators. Theoretically, the American garment employee could shift over to work in one of these other industries. But the tariff prevents his being confronted with this uncomfortable shift. Yet what about the Chinese garment workers? They could lose jobs because their suits have been taxed out of the market, are no longer in demand. They are forced to do something else for a living. The problem is not really solved, merely pushed outside the U.S. in this example. With the tremendous assertion of national sovereignties in recent decades, more and more controls of this nature and those of a similar nature have been grafted into the economy.
The same process goes on inside each country. To illustrate: With the introduction of diesel locomotives, firemen became unnecessary; there was no longer any coal for them to shovel. But labor unions managed to preserve the fireman’s job. After that firemen were, so to speak, paid just to go along for the ride. The fireman’s job was saved but only at an increased cost to railroad passengers and freight shippers. Instead of shifting the firemen over to making suits, which may have been in demand, the system pays him to stay on with the railroad. Meanwhile the customer pays more for hard-to-obtain suits as well as for railroad service.
The number of controls of this kind has grown massively in recent decades to take in virtually every facet of the economy, from small shops to gigantic corporations and farmers. Each nation, each union, each company, yes, each man, is looking out for himself. Such fear—largely understandable under the circumstances—is prompted by the knowledge that if each one does not care for himself, who will? As we have seen, the system is certainly not geared to do so unless it is controlled for someone’s special interest.
This clearly points up a major inability on the part of the present economic system. How can it preserve an overall system of supply and demand indefinitely, if, at the same time, it must set up measures that restrict that very system? Yet that is necessary if people now are to have jobs. It does not take an economic genius to see that such a cumbersome, self-contradictory system must at some time sag from its own weight.
Compounding the System’s Problems
But as if that were not enough, another hard-to-control major element enters the murky economic soup. Greed. Regardless of actual need, people want more and more material things and a “better way of life,” even at the expense of others. Each worker wants higher wages and each manufacturer wants increased prices for his product. So, in Paris’ Le Monde, Bruno Durieux refers to “the permanent struggle between social groups to maintain or increase their share of the nation’s wealth.”
If a man hired to make wool suits demands higher wages, then the price of the finished product must reflect the same increase. Other people who want to buy the suit then need more money from their own employers. So the products and services that they provide also increase in cost, generating a terrible spiral. Because of skyrocketing demand, products cannot be made fast enough, and so prices continue to mount. This is one vicious form of inflation.
Equally if not more devastating is the role that governments themselves have had in stirring up inflation. It was noted earlier that money merely represents true worth. A nation’s currency, in simple theory, should not exceed what it is actually worth, that is, what it can produce. But modern nations, violating this elementary principle, have printed money far in excess of their true worth. Usually this has been done for a reason; for instance, to pay war contractors in time of national crisis. But the excess money introduced into circulation eventually makes it worth less; everything costs more in terms of “dollars and cents.”
As inflation settles in, the nation’s people can only buy less for more money. Currency, in other words, loses its value, and in relation to the currencies of other countries it is worth less than it was before the inflationary period began. Thus it must be officially devalued on the world market. Foreigners are then able to buy more easily the now-cheaper products of the affected nation, creating even more havoc. How so? They are demanding the supplies that were already in short supply and that largely brought on the inflation in the first place. Results? More inflation! “Runaway inflation” now plagues the economy of most Western nations.
Of course, too, when money is devalued, it loses something other than just face value. It loses the trust of many persons. They stop investing and try to hold onto what they have. So, business loses the further capital that it needs to expand in order to meet the demand for products. Rather than stepping up production, they must cut it back, but prices remain high. People are laid off from their jobs and a “recession” could set in. The current situation in the U.S. and elsewhere is described by some as a form of recession. A record number of strikes, too, has cut down production.
Inflation, recession, unemployment—all at one time—are staggering enough to consider. But the current plethora of problems has grown to nightmarish proportions. How? By the introduction of new, unexpected elements. Oil prices have quadrupled and other natural resources are becoming harder to obtain and subsequently more expensive. These radical adjustments—unheard of only a few months ago—have affected virtually every industry in the Western world with staggering and sometimes devastating results.
Uncooperative weather has meant low crop yields; burgeoning populations grab for the limited supplies. Thus even once-inexpensive staples like beans and sugar have multiplied several times in cost. Almost daily a larger percentage of the average person’s income is used to buy life’s necessities.
People’s desire for more of everything has affected the system in yet another way and that is through credit buying. While the economy was expanding and seemingly virile, credit was popular. Currently, there seems to be some tapering off of credit use as people realize that they cannot pay off their debts with inflated money. The high interest rates on cheap money further frighten away borrowers. Less credit used means fewer products and services sold, further depressing production. But up until recently everyone blindly expected economic growth to go on and on. In the U.S. a total debt of $2.5 trillion has accumulated. That is over two times the total gross national product (or the sum of all the nation’s products and services in one year). For every U.S. dollar of money supply in circulation, there is now $8 of debt.
In fact, much of the seeming “economic miracle” made in the Western world in recent decades is really no more than a mirage, since it is based largely on debt—borrowed money. As Thomas Oliphant writes in the Boston Sunday Globe, Americans today are “much less better off than their parents . . . Their greater material well-being appears at least as much the result of a huge increase in the use and availability of credit as of a healthier economy.” The nation, like others, is hopelessly in debt.
Is it any wonder that with all these factors, and hundreds of others not here mentioned, twisting at the Western world’s economy, no one can accurately predict where it is heading? The problems are no longer limited to a few nations, but are all over and interlocked. The slightest adjustment in the political or economic situation of one country can jar the whole complex web.
Economists are thus adrift in the current economic ocean, dog-paddling to stay afloat like everyone else. They are baffled by the vast array of interacting factors. “Man’s knowledge of his own economic institutions is limited,” confesses R. W. Everett of New York’s Chase Manhattan Bank, Economic Research Division, adding: “Good analysis is made more difficult by the fact that these institutions are constantly changing.”
The impossible task before the economic forecasters is colorfully described by syndicated columnist Max Lerner:
“This is the season in the sun for economists. They don’t seem to know much, and what they do know they know to little avail. But they are beautiful to behold as they squirm and flounder, wriggle and leap about like fish in the encircling net of economic circumstance.”
Most of them hope for the best but can bring forth no sound reason for believing that things will get better. Even if the system were to pull out of the current crisis temporarily, how can anyone believe that it can maintain its balance in the future? As we have seen, its end seems obvious. The only question is, When will it end?
Persons with faith in the Bible know that world change—not just a major adjustment in the economic system—is coming. They know that the Bible says that the worldwide system cannot work and will soon pass away, to be replaced by one of God’s making. Right now, while obviously affected by the system in which they live, they do not rest their confidence in it. (Matt. 6:9, 10, 19-34) They look elsewhere for an accurate understanding of the future, and that is to God.
[Graph on page 20]
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U.S. INFLATION SINCE WORLD WAR I
World War I
World War II
[Picture on page 17]
“It’s the other fellow who is causing the inflation!”