Sometimes the best news isn't on the front page. Yesterday it was in the New York Times arts section. The article was entitled Ivory Tower Unswayed By Crashing Economy. While the article was about academic economists, it is also applicable to most disciplines, that exploring new ideas or theories is nearly impossible in an academic setting because of the intransigence of "elder" academic advisors. But that is another piece of writing for another day.
What is clear is that both the mathematical modeling and the reliance on traditional economic theory, that is, people make rational economic decisions and the market automatically adjusts to respond to those decisions, is the prevailing overarching belief system of economists.
As a friend dryly said a few days ago, "corporations are not people." Despite judicial precedent that allows corporations to have the same "rights" as individuals in this country, indeed, a corporation is not an human. Rather it is a composition of many many people, making many many decisions, most of them based on their own self interest rather than the interests of shareholders, other employees, or even the so-called health of the company.
Behavioral economists, a "new" branch of economic theory, much disdained by the Free Market theorists, believe that economists must also evaluate decisions by using theories from psychology. I would add anthropology and sociology. Hopefully, these new behavioral economists become prevalent and the reliance on both Free Marketeers and mathematical modeling (which tends to make assumptions based on free market theory) diminishes.
It will, I think, be interesting in time to read what these academicians begin to dissect as the causes of this current economic debacle. There is plenty of places and people who made so-called rational decisions. But clearly they were not in the best interests of anyone other than their pocket books. But the irony is there are no such thing as free markets, and those who lined their own wallets did so with assists from tax breaks and now with bail outs. Hopefully, economists begin to think about that, too.
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I hope that behavioral economists will be willing to consider the role of population density in influencing the behavior of consumers. I suppose that would require a willingness by economists to get over the black eye received over the whole Malthus/Dismal Science thing and to once again consider the ramifications of population growth. If they do, they may discover, as I did, an extremely powerful relationship between population density and per capita consumption.
ReplyDeleteTo explain briefly, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty. This theory is borne out by per capita consumption data gathered from around the world.
This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.
One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!
Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world's population.
I firmly believe that it is this relationship between population density and per capita consumption that lies at the heart of the huge imbalance in global trade that has collapsed the global financial system.
If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)
Pete Murphy
Author, "Five Short Blasts"