Monday, 26 August 2013

Is This Really an Economic Crisis?

The economy is in a  state of crisis but is this a crisis of the economy? We think not. First and foremost this is a crisis of the society. A crisis of the people. A crisis of values and lifestyles - see our blog on the matter. The economy, while being a very important reflection of our society, is only one of its facets. One could, ultimately, risk saying that a "healthy society" leads to a healthy economy and risk a bit more by saying that the inverse is also true. In effect, it is difficult to imagine a decadent society producing a thriving economy. The point however is this:

  • The economy is a system which is subjected to a set of non-negotiable laws which are always there and which always function, regardless of the fact that we find them to be "correct", just, or not. Ultimately it all comes down to the laws of physics and, in particular, to laws of thermodynamics.

  • Just like in the case of any other system of laws - take the mentioned laws of physics - if you attempt to violate them, Nature will tax you in proportion to the magnitude of the intended violation.

Consider the most basic law of the economy: what you spend must be less than what you earn. Every reasonable person and family know of this law. Clearly, if ones lifestyle exceeds ones possibilities one cannot "blame the economy" if things suddenly go wrong. If you hurt yourself falling from a tree you don't say it's because of a force of gravity crisis! If you drink and then crash your car, you don't blame Newton's laws for the damage or alcohol for the injuries. You are the only one to blame. The same happens with the economy. If you attempt to violate one of its laws it will inevitably respond with a set of mechanisms that will kick in regardless of the consequences.

As the Chinese say, wisdom starts by calling things with the right names. The substance may not change much but recognizing a problem for what it really is may help find new ways of approaching it. Consequently, instead of saying "economy crisis" or "economy meltdown" we should more correctly state "society crisis" and "meltdown of values and life styles". Nature offers no free lunch and neither does the economy. To start fixing the economy we must start by fixing the society. And that means one thing: values. If you replace books with smart phones or hard work with speculation and financial engineering what can you expect?