Tuesday, February 19, 2013

Output, Demand and Structural Issues

I suppose the current economic problem of the lack of growth in the global economy in general could mean that the understanding of professional economists of their subject is inadequate or is not suitable for the problems we now have at hand. The pricing mechanism of a market economy does not seem to give the needed signals for economic adjustment because of the difficulty of prices in the real world to adjust downwards - first of nominal wages and of nominal property prices - which are reflected in unemployed workers and unoccupied buildings. The Keynesian solution of governmental indebted spending has led to a balance sheet problem. With governmental budgetary constraint, the monetarist solution to the Keynesian problem by printing of more fiat money has led to an increased in consumer indebtedness or the so-called sub-prime problem.

The way to think about these problems is to figure out whether it is fundamental a supply problem or a demand problem. With prices failing to adjust, we have no way to tell. Manufacturing companies do not lower prices to clear stocks; they try to induce demand with offers or they simply stop production and lay off workers. There is a pricing strategy that has greatly to do with the image of quality (too cheap means too inferior) as well as that which tries to maximum profits to make up for the other loss-making models. For the firms to keep their staff, it is clear that their view of the world is that there is insufficient demand.

The second layer is the technological explosion which we are seeing at the manufacturing frontier. Convergence of technologies and miniaturisation are creating new products at lower prices and at such great speed of innovation that waves and waves of new products are coming onto the market all the time. It is tempting to say that there is an overproduction here. But this is the classic case of a dynamic market that is constantly pushing forward the production frontier. In a perfectly, structured economy, this is a good case. Workers are paid sufficiently well in line with their productivity growth so that their prevailing wages can take up the new supply and there is constant investment by the firms as they compete for supremacy.

In reality, the world is less than perfect and I wish to suggest that there are structural problems which do not allow the global economy to continue as it is without change.

It dawns on me when listening to the EU argument on transfer pricing by multinationals that, perhaps, there is now a new class of firms which operates across nations which demand tax-free status as well as incentives from poor governments which are anxious to create jobs for their people when the nations are deprived of ideas of how to grow investments indigenously. Part of the incentives is that there should be no labour unions so that their profit expectations will not be disappointed. It is a honky-dory world of multinational investments now famously called foreign direct investments, and the only risk they fall is a global recession when all bets are off and they are shown to be as incompetent as anyone else, even for their bullying power.

An FDI driven economy means that the economy is already incapable for endogenous investment. The only way the government knows how, according to conventional economic wisdom, is to go for government spending and monetary expansion, firing on both cylinders. The massive inflow of cash into the economy creates inflation. As nominal wages rise, workers are caught in higher income brackets in what is called the income tax bracket creep where the wage rise which is supposed to be adjusted for inflation is also taken a cut by the taxman. In such an economy, the disposable income of the ordinary consumers may not rise as much as expected. It could probably be world for economy without FDI as more monetary injections may be required to push for economic growth.

But it is interesting to realise that in a world dominated by multinationals, we may be facing a situation plagued by an oversupply as well as insufficient demand at the same time as a result of a bad policy mix of tax-free FDIs and fiscal and monetary expansion.

It may be difficult to get policy makers to think in terms of developing small businesses and local heroes. Neighbourhood development where a village becomes dynamic with small little services such as the baker and the butcher plus coffee shops and restaurants as well as financial services etc may be the way to develop further economic systems, even of megacities which may be a linkage of small metropolises. London is famously known to be a series of villages linked together. Kuala Lumpur is also another one composed of various villages. Putrajaya is not.

There may be a need also for the small financiers to come back and recapture the money world. We have also known the disruptive consequences of the amalgamation of banks in Malaysia into a few big giants which care mainly for the big boys and totally pushed the small individuals into the dustpan of consumer credit where they find ways of gearing the poor consumers to the hilt until they are choked of all their cashflow. If there is one cause for the asset inflation in Malaysia, it is the behaviour of unscrupulous behaviour of untrained bankers.

Whatever the World Bank may pretend that they know about how to develop the world economy, which they are not, their idea that a high income economy is made up of megacities such as London, New York, Tokyo, etc is bogus theorising. It may be true where all services are monetarised. But in small communities, where people do things for each other because they want to, it is the balance of a sufficient cash income and a high standard of living (not cost of living) that should be the focus of global economic development in a world that is livable for 95% of the people of the world. It is incredible that a few outliers should be cited as how the whole should emulate.

There is simply too much politicising of life in Malaysia. I happen to be out late last night for a quick supper in a remote part of the world and I saw and heard this native man obviously happily drunk but ranting with references to all politicians whose names have been well publicised by the media. Even in his happiest inebriated state, his little mind was filled with all things currently political. What a shame. Is modern life in Malaysia so reduced to be determined by the shenanigans of the untrusted few?

There is a flaw to the big business thing that is crawling into our little world. We have a sick old man trying to impose his misguided view of the world on the unfortunate devotees, with jealousy and hatred burning in his heart. We have a hapless incumbent hanging on his claws for dear life. We have the lost souls all looking for a way out of the hole we all are in but are encumbered by our little fears and our vulnerabilities.

One way forward is to simplify our lives. Reduce our needs to the basic so that there will be reduced effective demand for things that are polluting the world. Then there will be no economies of scale for the multinationals. There will be sufficient resources left for our daily sustenance.

14 comments:

walla said...

"The world is so empty if one thinks only of mountains, rivers and cities; but to know someone who thinks and feels with us, and who, though distant is close to us in spirit, this makes the earth for us an inhabited garden." (Goethe)



walla said...

The problem reduces to a simple task - how to put a mini vacuum cleaner into the small bottle.

Those who have managed to put small but intricate boats into glass bottles would probably know how to do it but one expects they would command a premium for their know-how.

walla said...

The mini vacuum cleaner inside the small bottle is needed to suck back in the genie that capitalism has let out.

Now that the genie of capitalism has granted the three wishes, we wish it has given us a fourth to ask it to return to its original abode.

But it exults in its new-found freedom and serf no longer pays heed to former master.

walla said...

To go back to basics is more than zen. It is a necessity in a new world imperiled by malthusian growth diminishing natural resources leading to industrial contamination of what was once a pristine planet.

However such a necessity can only be met if we can somehow stem or reverse the march of material progress that is like one tortoise standing on another all the way up to the sky.

Since the genie is out and it knows its very own survival depends on it not being banished back into the bottle, it has quietly inserted a one-way valve on the bottle mouth. Namely, out only.

walla said...

Perhaps that is why the notion of subsistence living where personal needs are pared to the minimum and localized into some barter market is hard to contemplate.

A threadbare fortitude requires one to have only the bare minimum adequate for day-to-day monochromatic existence.

There won't be place for softeners or whiteners. Or insurance and stock brokers. For that matter, any broker or middlemen. One pair of shoes, another of sandals will have to suffice. Socks and shaving cream (for men) are out. So too supplements and perhaps suppositories. No hard copies of anything; just e-walla. No need for mobile phones or i-pads. Neither subscribed tv nor movies at the cinemas; certainly no popcorn, and definitely no mineral water, spring or osmosed. It would be healthier to have only one low-calorie meal a day. No beverages; of any kind. Water shall be used frugally; one bath a day will do. It is also not necessary for air-conditioners; something will have to be done about tropicalizing buildings to fight heat.

Bicycles will return; more walk less talk. Ok, add a pair of air-soles. The healthcare industry will be put on public perfidy display. The education sector as well. e-walla is the way to go.

There will only be one constituency per state. Win that seat, win the state. Has the service level been any different these days, you ask in complete agreement....


walla said...

We already feel healthier and bouncier reading the above comments. Lighter as well from finally disentangling the conundrum of supply embedded inside demand embedded inside supply embedded... like those tortoises of infinity.

walla said...

Then we find out that the problem is pricing which fixes distribution which affects means which results in uneven capability and thus destiny.

Simplistically if the price is low, the demand should be high but something else happens at that comma which irrationally turns the tide elsewhere, often at the decisive moment when cash-flow hits.

Like the stock and other markets, irrationality results from rational thinking of herds what one expects otherwise from individuals which compose them.

The herd instinct of capitalist markets destroys what it makes.

walla said...

Why destiny?

Because pricing is more than contract, cash and special prices although one wonders how something to finally cost rm12 Billion can be cash.

Pricing is also parameters of finance.

However, in this country whose economy is sandwiched between multinationals laughing at circus shows and locals reduced to poster finance, the parameters of finance has less to do with that august field than with politics of personal gain.

Which would explain why prices can be special if due diligence had been done at the contract stage.

It wasn't. Therefore pricing was fixed. So where's distribution?

Economics has no real place in this country run on the ron's of greed, cunning and simpletonification of power.

Better set up a photo shop instead. Like...here.




walla said...

We are products of our times.

Therefore, it is important to seek enduring and testable truths for clear and long-term objectives.

We need to clarify ideals that lead to ideas that resonate towards solutions people will ultimately have to accept whatever their predisposition and philosophy.

We cannot be cowed by cowardice born of slanted adjustment to those who happen to make the loudest noises not founded on rational arguments whose core and kernel elements are a holism and humanism of the moderate that have been lost in the melee of the personal grasping of changing straws.

We must walk a new middle path towards truth.

What paves that path?

A political enlightenment;

A well-educated and trained population with high altitude and good attitudes;

A wizened ability to attract higher technologies and techniques;

Better standards of living founded on living an examined life;

Cleaner and greener country sponsored by a more gracious and concerned society maintained by a more fastidious and efficient administration; and

Centralization of the deals of moderation and wisdom that form the last line of defense in a globalized world.

walla said...

All the anguish signaled from the present socio-economic-and-political landscape today reflect our citizens have realized we have veered away from those signposts of that path.

It is the ultimate structural issue for us.

For instance, we have to be mindful when we discount the role of megacities in concentrating networks of means and opportunities for the young will find the attractions therein more vital than any less arduous non-city life more amenable to those who have already gone to their final life-cycle of each life.

On the other hand, the opinions of the old must also be solicited for they have seen too many well-laid plans turned to dust from the tragic way events seem to take on lives of their own.

I have already argued the political ramifications in an earlier series of comments and expect no contrary response for if there are any real ones out there, they would long have been equally posted.

As Voltaire once wrote, we have to tend to our own garden. The one we are all in belong to this nation. I am not talking about gardens with flowers and weeds. The one we inhabit every day is the one in our mind and our mind's eye and heart.

Whatever may happen elsewhere, let us regroup our strengths and resources, repel all that is bad in human nature, and recompose a new way forward for a better Malaysia.

It is doable. For we have no choice.

We all owe the young that much. Our last ounce of intelligence, strength and conviction.


http://is.gd/pjq6Xe


walla said...

All the anguish signaled from the present socio-economic-and-political landscape today reflect our citizens have realized we have veered away from those signposts of that path.

It is the ultimate structural issue for us.

For instance, we have to be mindful of ourselves when we discount the role of megacities in concentrating networks of means and opportunities for the young will find the attractions therein more vital than any less arduous non-city life more amenable to those who have already gone to their final life-cycle of each life.

On the other hand, the opinions of the old must also be solicited for they have seen too many well-laid plans turned to dust from the tragic way events seem to take on lives of their own.

I have already argued the political ramifications in an earlier series of comments and expect no contrary response for if there are any real ones out there, they would long have been equally posted.

As Voltaire once wrote, we have to tend to our own garden. The one we are all in belong to this nation. I am not talking about gardens with flowers and weeds. The one we inhabit every day is the one in our mind and our mind's eye and heart.

Whatever may happen elsewhere, let us regroup our strengths and resources, repel all that is bad in human nature, and recompose a new way forward for a better Malaysia.

It is doable. For we have no choice.

We all owe the young that much. Our last ounce of intelligence, strength and conviction.


http://is.gd/pjq6Xe


walla said...

All the anguish signaled from the present socio-economic-and-political landscape today reflect our citizens have realized we have veered away from those signposts of that path.

It is the ultimate structural issue for us.

For instance, we have to be mindful when we discount the role of megacities in concentrating networks of means and opportunities for the young will find the attractions therein more vital than any less arduous non-city life more amenable to those who have already gone to their final life-cycle of each life.

On the other hand, the opinions of the old must also be solicited for they have seen too many well-laid plans turned to dust from the tragic way events seem to take on lives of their own.

I have already argued the political ramifications in an earlier series of comments and expect no contrary response for if there are any real ones out there, they would long have been equally posted.

As Voltaire once wrote, we have to tend to our own garden. The one we are all in belong to this nation. I am not talking about gardens with flowers and weeds. The one we inhabit every day is the one in our mind and our mind's eye and heart.

Whatever may happen elsewhere, let us regroup our strengths and resources, repel all that is bad in human nature, and recompose a new way forward for a better Malaysia.

It is doable. For we have no choice.

We all owe the young that much. Our last ounce of intelligence, strength and conviction.





walla said...

..we may have to go back to the really basic..

http://is.gd/pjq6Xe

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