Life Economics

I like economics. I am interested in theories of how parts of systems interact. I am also interested in sustainability, exploring what keeps systems continuing.  This interest has often led me to view human economics with dread, simply due to the unsustainability of the system. Economic models seem limited as individuals are not ststic and they change as they progress through life stages.

A lot of human economic theory presents individuals and entities as rational players of a game, that participants make choices. I would argue that choices are very much constrained, players are really powerless pawns within the system that imposes the solution to individuals need to survive.

The global financial crisis of 2008 demonstrated the weakness of the predominant form of capitalism. Modern society is reliant on the banking system, through which capital ends up in the hands of bankers and everyone else, citizens and government institutions end up in debt to. The system leads to a decrease in liquidity, which constrains growth.

The problem is growth. Most capitalist systems rely on economic growth to function. Real growth only occurs through productivity growth. Firstly through innovation and finding more efficient ways of working, this growth is achieved. Secondly it is achieved through leveraging, by specialising and economies of scale. This second type of growth is constrained by sustainability, you can only expand an industry so much before environmental constraints begin to increase, required resources become harder or more expensive to obtain at higher levels. Leveraging is also constrained by reaching saturation of the market for the product. This type of growth is a problem because when growth is continued to be sought, the market can over-leverage and be supported by capital based on credit.

We currently live in a globalised economy. Trade occurs at a global scale. This aids leveraging growth, but further constrains localised sustainability and global sustainability. It also makes it harder to see where sustainability costs are increasing as the players are not local.

What is the economic experience of individual ‘players’ in the UK. Due to globalisation, simple manufacturing production is uneconomic, the cost of living is higher than the return for such endeavours. What people in the UK can do, is provide intellectual services as parts of interlinked production webs. To do this requires a high level of education. In recent years this requires paying for, so a large proportion of young people require £60000 of credit to achieve the skills required to work.

In the UK we have high housing costs. Rents are high. So it makes sense to buy your own home, as over an individuals life time it is much cheaper to buy your own homes, even if that involves taking out a mortgage. So by taking the only sensible option, young people in the UK now have £250000 of debt before they even start doing anything. The decision to  have children must occur before awareness of ability to pay for having children, before they have made any economic ‘choice’, the only choice, being living in an area where housing costs are high because that is where the jobs are. Which means the banks make a lot of money out of everyone.

The upshot of this is bad economically. The cost of living and servicing imposed debt is proportionally high, leaving disposable incomes low. So there is little money to spend or invest in new growth. Individuals and businesses cannot take risks on new ventures because they have large debts/costs to service.

The problem the UK finds itself in is that the banking system messed up. House prices rose, individual debts rose in line with them, disposable income declined, as almost all wealth generated went to the banks in interest payments. Yet in 2008 the banking system collapsed. The UK economy is largely made up of intellectual finance services, so it could not be allowed to go bankrupt. So the government borrowed money to keep the banks afloat. Really part of the solution should be wealth redistribution from the capital hoarding rich to the public, to increase liquidity and encourage growth. The problem with a globalised world is that the rich can escape taxation/ repaying their debt to governments by moving their capital offshore.

What I and many don’t understand is why to support this system, everyone is in debt to it, now including the government. The banking system doesn’t pay compensation, just requires taxpayers to pay the interest on their own loans and the government borrowing to the banks, the latter only existing for the banks survival?!

Traditional leveraging, through taking out loans to buy equipment or training to enable a player to produce a product at the market price, works because the income gain is higher than the cost of the loan. For individuals that £250000 debt, may not be paid off though the economic life of the person, it is simply assumed that individuals will have enough income to pay off the debt, which makes the cost of labour artificially high, due to the requirement to pay off this debt of each worker.

In an economy so reliant on banking and vast amounts of credit, is also ones that undergoes economic cycles, caused by the amount of credit in the system. Over an individuals lifetimes, this creates costs, especially if you are unlucky with time on being at a certain age in a particular period in the cycle. The economic game is unfair on some of the players. Particularly the current generation in their 20s, high housing and education costs, high taxes to pay off previous debts they received no benefit in return for and to care for a large ageing population.

So, what of the future for Britain, saddled with huge debts, an infrastructure that becomes less efficient as economic growth occurs? Wealth inequality is high and increases as the bankers continue to cream off the interest from everyone else’s rising debt. This wealth is used to buy land and keep housing costs high, even during a recession, so there is no correction in prices when the economy slides from over leveraging. Growth is constrained, all organisations are not becoming more efficient as they are tightening belts (austerity) and in coping with crisis mode, which involves being less efficient than normal.

Real growth occurs outside the financial services, financial services don’t actually produce anything other than inflating the value of capital. It is an individuals ability to make market choices, which ultimately supports productivity growth, in a world where the number of true markets is decreasing. However the more debt each individual has, the fewer choices they have over where there money is spent. So where there is growth it will be less leveraged.

It’s scary, thinking about economics. Especially living in such an inter-dependent global economy, where returning to subsistence agriculture isn’t really an option should the whole system collapse. Unless you are lucky to be very rich and have large assets, there is very little an individual can do about it. I am no expert on this, but it seems we need to change the system so there is less reliance on credit, acknowledge that credit isn’t quite the same as real money, it is loaned at a risk and creditors need to perhaps be more ready to take the hit on their disposable income when the economy re-balances. After all they do very well when loans are readily re-paid in an upward leveraging cycle.


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