This is a long post about my latest readings trying to understand why the world economies are in a mess. Don't expect any clear answers, as I am still struggling to understand if anyone really understands what is needed.
Where did Internet economics go wrong? One book I may need to read is Re-Thinking the Network Economy by Stan Liebowitz, professor of economics at University of Texas.
- When the value of a product increases with the popularity of the product, that is a network effect ... telephone, fax machine, e-mail.
- Strong network effects mean advantages to the companies that grab market share ahead of latecomers to the competition.
- Superior quality can fail because people wait to see other people try them out first, while remaining with that which appears to integrate well with the network.
- But there is also a cost to learning something new, and using it in concert with other products you already have.
- Superior products need superior marketing, and people able to use them without losing advantages they already have.
- I am not convinced this book, as reflected by the review, is saying anything that is really new to me.
Check your local book store and pick up the latest Economist. The Sept 28 to Oct 4, 2002 issue focuses on the dismal state of the world economy, various theories economists are operating on, and whether we can rescue ourselves from the current mess.
If you want numbers, turn to the back of the magazine to get charts by nation of unemployment rates vs. a year ago; wage trends vs. prices; proportionally how many people get how much info from Internet vs. Radio & TV; Financial indicators; Stock Market trends; exchange rates; Government debt, compared to 5 years ago.
For corporate America, the current recession has been the most damaging since the 1930's Great Depression, leaving many businesses having excess debts. Is the stock market slide just a loss of confidence in fraudulent accounting, or more sinister. The Economist talks about what went wrong in the dot com bubble and what still needs to be fixed in the aftermath, then there is analysis of what has happened in past technological revolutions, with most of the benefits of higher productivity going to consumers and workers, in the form of lower prices, and what material benefits we can get from our wages, rather than in meaningful profits for corporate investments. This means that people need to invest towards pensions, which lowers business growth.
Europe's stock markets are suffering worse than America's while Japan is in a rut.
The Economist is telling us that the Western World is on a collision course with deflation, which they say is worse than inflation, but today's central bank leadership learned their trade in a world where the worst threat was inflation, and they are ill prepared to deal with today's reality. Are we headed for another Great Depression, or can the IMF, the Fed in the USA, The European Central Bank, the Bank of Japan, and our friends in Argentina and Brazil, in concert get the doldrums turned around?
There's a lot in common today with the eve of the Great Depression. Popular wisdom that the old business economic rules did not apply any more, a long economic bubble that seemed like it would never end. In the alst 20 years, America was in recession 10% of the time. In the 90 years before WW II it was in recession 40% of the time. In most of the rest of the world, the trend has been to shallower recessions, and longer periods of prosperity. The revolt against Keynesian policies since the 1970's was based on the belief that government intervention destabilizes an economy, but we have just seen that capitalists also can destabilize an economy.
As an introduction, I should say that I look favorably upon the theories of Henry George, who was a contemporary of John Maynard Keynes, the father of economic theory in the West, and of Karl Marx, the father of socialism in the communist nations. I would like to see a continuation of Keynesian economics but with a good infusion of some of the Georgist philosophies.
Until space travel is better developed, the limiting factor for capitalism is the surface of the land, its fertility, and the mineral wealth below. Henry George felt that the environment was sacred and that the only taxes should be on the basis of the amount of land needed to sustain business enterprise. Thus, farmers should not be taxed on their crops, and part of the tax should be on the basis of how much the water is polluted, while businesses that clean up the environment should get tax credits in proportion to how they have contributed to the clean air and lack of medical risks delivered to the population.
Under Keynesian economics, environmental disasters are a good thing for the economy, because the environment has zero value, and money spent to clean it up means an investment of labor and capital.
When with Its the Economy Stupid return to center stage in election campaigns? Europe seems to be mired in Immigration controversy. America is focused on ousting Saddam from Iraq, which the Economist says will rise Oil Prices, which I think will hurt Europe and Japan more than the USA, depending on how the Airline bailout goes. Can South America figure out how to get out of their economic mess?
Will the anti-IMF protesters ever figure out how to tell the people what it is they want? What I see on the TV are a bunch of anarchists who do not believe in capitalism. If the news media is correct, then for them to communicate their message via the Internet would not make sense, because the Internet is grass rooots capitalism.
There are related articles such as an analysis of emigration immigration impact on the nations involved. America subsidizes foreign student education at a time that individual states are running out of money to finance domestic colleges. What is the impact on the middle class of nations with massive volumes of their smartest people leaving for other nations ... do they get enough money sent back to the families to compensate? Higher education becomes more important because it is seen as a way out of the nation. International trade flourishes between the nations the people are leaving and those they are going to. Very few nations now try to prevent their people from leaving, instead they try to solve the problems that are fueling the exodous.
The Economist suggests that what the nations losing talent should try is to promote dual citizenship, so that their former citizens will be more likely to continue to participate in the economic life of their old home and their new home. The UN has a program where expatriots may return home to help out with the assurance that they are free to return to their new homes. 300 Afghans who were educated abroad have returned to help out, and 4,000 have registered for this. The tougher it is for migrants to enter a nation, the less they are likely to leave once they get there, so the rules need to be adjusted to make temporary migration easier.
Several countries in the Americas have pegged their economies to the USA dollar, which means they need high productivity, low costs, and Central Banks that know what they are doing. Perhaps the nations that are doing well economically need to provide seminars for those in trouble. Argentina send its politicians to Universities in El Salvador, and other places, then when those other places economies doing well, use that fact in their political campaigns. Paraguay needs several kinds of reform. One third of Mexico's income is from oil, and the oil workers are threatening to go on strike.
Does anyone know what they are doing? The collapse in South America is spreading to nations adjacent to where it started. Would devaluing the US dollar be constructive? It would reduce the capital flight from South America, and improve US exports, but then perhaps Europe would be in the mess that the Americas now are in.
The USA is currently in a turmoil of Wall Street scandals in which one of the root causes may be lobbyists from big business persuading Congress to bend the rules to prevent proper inspection and regulation. Likewise the IMF is being accused of getting too close to the clients they supposed to be managing, so that there has been a pattern of bad loans. But part of the problem is the whimsical nature of international capital markets. They think some nation is a great investment. That nation's economy soars. They lose confidence in that nation, and a crash results there. The nations need to put some limits on to what degree they are captives of the international speculators. Is it time for some nations to declare bankrupsy, and if so, how much power should be handed over to creditors who contributed to the situation? The IMF is studying such a plan, called Sovereign Debt Restructuring Mechanism (SDRM), but nations that declare bankrupsy will continue to need an influx of capital, which means the IMF will need even more money than in the past.
President Bush, on the one hand seems politically opposed to Bailouts of other nations, but America promoting them in Turkey, perhaps to win support for the war on Iraq, and in several South American nations.
While Latin America's debt burden, as a share of GDP, is far lower than that of emerging nations in Asia, it is astronomical compared to its exports. An IMF World Economic Outlook analysis concluded that countries with deep financial integration but low trade integration are particularly prone to debt crises and currency crises. I want a translation, which I guess I will only get by reading more articles on what's wrong with the global economy, and in particular the nations that are leading the slide into worst times.
The main criticisms of the International Monetary Fund, which has been involved in the Americas for so long, that it ought to have aquired a reputation comparable to Greenspan in the USA, out of sheer experience solving economic challenges, are:
- I have often believed that the biggest problem with economic foreign policy is that huge sums of money are given to Big Government Bearocracies with ample opportunity for corruption, when in fact what a lot of emerging nations have needed is support for grassroots capitalism on a foundation of a reliable banking system and rule of law.
- The Economist points at inconsistencies in US foreign policy, where as different political parties achieve supremacy, the White House gives generous loans to nations that will go along with either the Democratic or Republican party line when that is kind of irrelevant to their nations.
- The Washington Consensus of policies for emerging market prosperity are not being adopted, but they also need to be done in a fertile economic climate. Mexico's former President recently wrote in Forbes Magazine that the region suffers from far too little reform.
- Conventional wisdom says that for sustainable growth in Latin America they need more than liberalization and privatisation. They also need decent education and judicial reform.
5:52:51 PM 
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