The blog provides a left-wing non-partisan perspective on socio-economic issues in Russia and throughout the world. The focus is on qualitative development of national economic systems and ensuring flexibility in economic policies to meet the challenges of the 21st century. Email: leftistobserver@gmail.com

GROWTH BEYOND THE LIMIT


The economic development of the past two centuries has changed our world quite a bit. If our ancestors had a chance to take a look into the future, they would hardly be able to recognize the world. The very first thing they would notice is our ability to produce economic goods beyond our needs, which was unthinkable back in the days due to limited technical capabilities. Consumption-based production has transformed into production-based consumption. Humanity no longer seeks ways to improve production to satisfy needs. Instead, we are now looking for more sophisticated ways to consume the glut we have produced.

This definitely has some positive sides to it and is in fact commonly viewed by many as a panacea to solving the world’s most critical economic problems: unemployment, budget deficits, etc. Economic prosperity and a wider range of available goods and services undoubtedly make our lives easier and more fulfilling, but there is something that doesn’t quite go hand in hand with the economic reality.

Increased consumption is only seen in the developed world, while other countries are still lagging far behind. In fact, socio-economic inequality has been growing more and more rampant. In other words, only certain parts of the world can appreciate the benefits of constantly improving production capabilities.

There is another problem often overlooked by modern economics – now that we found ways to improve production by introducing new sophisticated technologies, we have long come to a realization that consumption must be stimulated in a similarly sophisticated manner. It now turns out that developing production capabilities is not enough. In fact, globalization often makes it unnecessary if production can be moved to other countries. A consumption potential of an economy is now becoming an important factor, so vital that it can be considered almost another production factor, even though it is not officially recognized as such. Previously, there was no need for such recognition since consumption limitations of the past were successfully addressed by means of economic expansions. But within the framework of globalization, finding new external markets is becoming more difficult and costly. An ability to boost consumption is becoming vital for stable economic development.

Globalization is redistributing both production and consumption globally causing some countries (e.g. China and India) to “specialize” in production and other countries in consumption (e.g. developed countries of North America and Europe). Problems with consumption in the developed world will immediately affect production in the developing world. Thus, boosting a developed-country consumer’s spending becomes a global project involving the entire world economy.

Having considered all of the above, is a constantly expanding GDP that much of a perfect solution to economic problems? It appears to be quite the opposite if it exceeds the natural level of consumption on a respective market. In this case, consumption will have to be boosted at any cost. Otherwise, the market will see an “over-production crisis” as termed by Karl Marx.
For quite some time, consumption was able to be lifted to higher levels by means of credit, which entailed a creation of an entire mechanism of global credit expansion with its respective institutions. But credit also expanded production thus making a crisis like the current one an inevitable thing. It is in fact an ordinary over-production crisis (or over-accumulation crisis as named by some economists), but on a global scale.

But any long-term expansion of credit soon becomes unsustainable when ultimate consumers will not be able to borrow any more, their servicing of previous debts becoming more and more challenging. That is when they will start defaulting on their loans. When debt has saturated an entire economy and eroded many households’ incomes, the financial system collapses, any disbalance in any tiny segment of that system being able to send the entire economy spiraling down. On the surface, it may look like a FINANCIAL problem while its roots lie deep in the inability to further ECONOMIC development. That is why those who understand political economy rather than economics alone are reluctant to call it a FINANCIAL CRISIS. It is in fact an economic one. This time defaults in the US sub-prime mortgage market, a small segment that deals with borrowers whose credit histories are far from perfect, were sufficient to trigger a major global economic disturbance that spilled into the real sector.

Boris L. Anisimov

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