Thursday 20 January 2000

Pic of the day: "It just might be a good idea to leave one of your credit cards at home..."

Yes, I am thinking of Adam Smith's famous book, "An Inquiry into the Nature and Causes of the Wealth of Nations". While Smith was certainly not creating it all from scratch, his book is generally counted as the foundation of modern market economy. The market economy has proved to be superior to all other means of creating wealth, and has lifted the living standards of the western world to heights that could hardly be dreamed of only a couple of generations ago.

And yet, we still don't know the nature and causes in economy all that well. This is the reason why there are so many opinions. Well, there is also some sheer stupidity, of course, not least in politics. But even among the intelligent and serious economists, confusion reigns about the details. Such as (yes, point is coming) the current Long Boom of America's economy.

Ironically, one reason for the Long Boom may be the doubts that it exists at all. If so, it is about to end.

We know quite a bit about the economic cycle by now. Among other things that it is not a cycle but a wave. Basically, economic expansion has the power to magnify itself, and so has the contraction. The shift from expansion to contraction occurs when the growth meets its limits. During our lifetime at least, the single important limit has been the human capital: The workers. A shortage of labor leads to increased wages. This may seem like a good thing, except the cost is added to the price of the products (goods or services) and so you have inflation. So the solution to the shortage of labor is a non-solution. The economy hits the wall, and a contraction starts and feeds on itself. This should have happened to the American economy well before now.

The continued growth of the economy is generally seen as good news. There are actually a few people around who claim that we in the western world are too rich already, and that economic growth makes things worse rather than better. Yet the beauty of the market economy is that it is based on how people act, not on what they say. And collectively, people want more, more, more. And then some more, please.

What has happened in America (and in Norway, locally known as "America's loyal poodle") is that workforce seems to be seeping out of the woodwork. The same people work longer hours and there is a trend towards taking work with you home. At the same time, the workforce is expanded with women, youngsters and the elderly. And most surprising of all is that they all seem to do this without demanding higher wages. Usually a reserve of anything is only accessible at a higher cost than the main body of the resource. What happened?

The naked truth is that we don't know. I wish you people could tell me why you work more. Is work becoming more fun? Is it easier to work now than before? Are you afraid that you would lose your job if you demanded more money for the same work instead? Or is it, as my personal little theory says, that you are being paid in future money?

The invention of future money is certainly a new height in creativity. I notice that particularly the IT industry is doing this liberally, typically in the form of share options. In my slightly younger days, employers would sometimes offer to pay part of the salary in shares. The employers would then be motivated to work towards the common good of making the company profitable, so their shares would be worth more. Of course, once in their hands, the shares could also be sold. So the natural extension was to not pay in shares, but in future shares. You get the shares some time in the future, and the better the business, the more worth the shares. So people would be inclined to stay with the company and work hard for its continued growth. And above all, they would be inclined to talk up the share price by praising the company to any and all, while trying to hide and cover up any weaknesses.

But what if it doesn't work out after all? What if there comes a cyclic contraction for other reasons? (The oil crisis a few decades ago springs to mind, though it would probably be something else the next time.) If we get a general downward slide in share prices, your future money would be worth less and less and quite fast nothing at all. All you would have was your regular pay, which is not so impressive once you look at it.

It could get worse. Because it seems that quite a few people have actually started to use their future money, borrowing in the form of unsecured credit (such as credit cards). These people would have to stop spending and save money, and this would dramatically reduce the demand for goods and services. Which would make the economy collapse even faster, making the future money worth even less, forcing them to save even more ... you get the point.

When the entire Albanian economy collapsed due to most of the people being involved in a pyramid scheme, the result was civil war. I trust our American friends will behave more sensibly. But I think it just might be a good idea to leave one of your credit cards at home next time you go out. In case the future money doesn't come, after all.