A Handful of Beans

The true scale of today's economic crisis...

ECONOMIC THEORY attempts to deal with a limited number of factors and the mechanisms by which they interact, writes William Rees-Mogg for The Daily Reckoning Australia.

   The main factors that economics tries to deal with are population, food, energy, property and manufactures. All of these are physical realities, capable of being counted. They are the beans which bean counters count with.

There are then four mechanisms of exchange – money, barter, markets and allocation. These are the mechanisms by which the beans are exchanged.

  
Different economists have put a different emphasis on different factors. David Ricardo, the classical economist of the nineteenth century, was a banker who gave special attention to money; Thomas Malthus, another founder of nineteenth century theoretical economics, paid particular attention to population. Indeed he is the founder of population studies.

  
Karl Marx, the founder of socialist theory, paid attention to manufactures and to population, seen particularly as labor. The leading twentieth century economists, such as Maynard Keynes, Irving Fisher and Milton Friedman, have been derivatives of the Ricardian or monetarist school. Even Keynes, though a rebel against classical Ricardian orthodoxy, developed his theories because of it.

  
Unfortunately, however, it is impossible to think of all these four economic factors and exchanges simultaneously. Perhaps there will be a time in the future when some super-computer will be able to calculate the inter-reaction of the global economy holistically. But we are still far away from that day.

  
So at present, the limitation of the human intelligence means that we can only concentrate effectively on one economic factor at a time. The selection of any one of these factors or inter-reactions for study draws attention away from other, equally important factors. One can be both a Ricardian or a Malthusian, but one cannot concentrate on both aspects of economic analysis simultaneously without a loss of focus.

  
One can simplify economics, however, by using the different physical factors as a checklist to detect signs of difficulty. And it's here that economics does indeed become the "gloomy science".

  
At present, the world is suffering from a crisis of overpopulation, with the human population stretching the food supply beyond its limits. Population is continuing to grow, although there is already an inadequate food supply for six billion people and growing famine in Africa. It is possible that the twenty-first century will replace the nineteenth as the century of famine.

  
Food is very closely linked to energy. Food production is dependent on the oil industry, in cultivation, in transport, and in protection against pests. The food price has followed the oil price to the point at which millions of people cannot afford a minimum food supply. That is already a catastrophe, and the trends are unfavorable. There is also a significant shortage of water.

  
Markets have flagged up food and energy as danger areas for the world economy, by raising their prices. Property and manufactures are secondary to food and energy, in that their prices can change without immediately affecting the price of food and energy. In fact, there has been a worldwide fall in housing prices, particularly notable in Britain and the United States, at a time of steep increases in the food and oil prices. The price of manufactures has long been held down by the growth of low cost Asian manufactures.

  
There is much discussion of the scale of the global economic crisis. Some people expect it to cause a crisis comparable to the Great Slump a wiping out of capital values, a liquidation of global debt. We cannot yet be sure, but we can see that the main factors of global economic development are all in difficulty.

  
On the one hand there is oil near $130 a barrel; on the other, there are banks writing off billions of dollars of assets. I do not see any basis for economic analysis which would not throw up really alarming signals from these facts.

  
The current adjustments and re-emphasis of the fundamental factors in any analysis put huge pressures on every government. In the 1930s most governments were destroyed by the slump. In Britain, Labour lost office in 1931; in Germany Hitler came to power in 1933, as did Franklin Roosevelt.

  
I fear that process will be repeated, even if only by democratic defeats. The storm of the world is still rising.