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.