William Laraque, Managing Director at US-International Trade Services
14.07.2015 01:00 am
Are economies properly described by parallel lines or by interconnected lines? Are economies Linear as in a Supply Chain or are they a web of entanglements as in quantum mechanics?
I was thinking the other day about how the human brain functions and of how this function is described. As I was listening to a series on the the brain on the Discovery Channel, I noted that the brain is an interconnected web of functions based on the firing of synapses. This got me to thinking about how economies function.
Amitai Etzioni described economies in a 1981 book called A Modest Agenda. The book is about rebuilding the U.S. economy. It is about creating economic and job growth. Nothing in the world is more discussed than this subject.
Etzioni claimed that economic growth involved 7 elements. 6 elements involve infrastructure. They are:
• Transportation of Goods
• Communications Systems
• Power (Energy)
• Human Capital
• Financial/Legal Institutions
• Research and Development/Innovative Capacity
The 7th element is special. It is Capital Goods. In a developed economy like that of the U.S., this involves saving and investing in the productive capacity whereby goods essential to an industrial economy, steel mills, cranes, machine tools, and so on, are created. It is the seed corn of infrastructural and industrial development. If a country doesn't have the means to create or finance this productive capacity, it must depend on FDI or foreign direct investment and donations, to finance its economic growth.
Before getting entangled (pardon the pun) in economics, a little joke. The joke (more truth is said in jest) is that if you lined up all the economists of the world at the Equator, side by side so that they encircled the Earth, they still could not come to a conclusion.
On to economic, not economist formations!
A little Prehistory
Economies are based on trade, an exchange of commodities. Productive capacity provides for a surplus beyond self sufficiency. The surplus of one person is then exchanged for something given in exchange, a medium of exchange, by someone who doesn't have any, someone who is hungry or needs clothing, shelter, etc. I read this in Lewis Mumford's book "The City in History." In simpler words, once Humans reached the Neolithic Age and began to grow tubers and harvest clams and oysters, they also began to save food. The Neolithic Age is distinguished by pottery and soft handled tools that enabled scraping and the preservation and saving of food in bowls and ewers. The previous era, the Paleolithic involved sharp, pointed tools for hunting and cutting, killing of animals.
Back to Basics
Once people were able to be self-sufficient in food and shelter, they started to trade. The fundamental process evolved into the Industrial Age wherein the farmer, fisherman, miner, were replaced by Industrial Man who lived in cities where the 6 elements of infrastructure converged.
After the invention of money as a practical means of exchanging goods (so much easier than carrying buffalo and sacks of potatoes around every time you wanted to trade), Industrial Man monetized or turned his assets into money by using the 6 elements of infrastructure.
The process of monetization involves use of the 6 elements of the infrastructure in order to turn to money the portable assets "possessed" by the farmer, the miner, the fisherman, the inventor. As Marx wrote in Das Kapital ( I had to read in for Professor Perlunger's high school course in political science: very boring reading), a problem occurred when someone declared "this is mine." Kids in kindergarten are taught to share. This is not taught on Wall Street.
A problem arose as industrialization and more complex economies evolved. Let me provide an example. A bag of coffee purchased for $200 from a grower in Costa Rica ends up generating more than $10,000 when it is distributed and sold by Starbucks. If you put an even smaller volume of coffee after sorting, blending, roasting, grinding it into Keurig cups, the price of this same $200 bag of coffee at the distribution point is more than $12,000. The problem is that the farmer in this case is separated or disenfranchised from the $10-12,000. He or she is also located in a different country than the distributor.
Let's get all sophisticated now and discuss the social and economic implications of disenfranchisement from monetization. Joseph Stiglitz, the Nobel Prize winning economist encapsulates this nicely. He wrote that "Much of America's inequality is the result of market distortions with incentives directed not at creating new wealth but at taking it from others."
The issue as emerging economies "run down the highway" of industrialization and as developed economies such as that of the U.S., "run down the highway" of post-industrialization is how do we create equality; economically, socially, politically?
That's a song for a different day. Stay tuned for V. "I am a Rock."