Let’s string out some of the things they say about various economies, and determine from what we discover if these people know what they are talking about. Here is the string:
Russia’s economy is smaller than that of Italy. Italy’s
economy is a small fraction that of America. America’s economy is comparable to
but slightly smaller that the combined European economies. What Russia is able
to spend on defense is only $60 billion, which is a tiny fraction of America’s
military budget that amounts to $750 billion. Note that this is a whopping
twelve and a half times that of Russia. Despite all of this, however, the NATO
alliance, which combines the powers of America and Europe, is terrified of
Russia’s military might. What the hell is going on?
What’s going on is that there is a cosmic size idiocy
underpinning the analyses that people do off-the-cuff when they speak about the
economy. They form opinions based on the snippets they hear from the various
economists, without realizing that the snippets do not fit together but that
their mixing creates monstrosities such as saying that Russia’s economy is
smaller than Italy’s. So then, what’s the truth?
The truth is that there are two types of economies. There
is the civilian, consumer-oriented economy, and there is the war economy. The shameful
history of Western Europe and America spanning from the eighteenth to the
twentieth centuries, did two things. It compelled the countries of the two
continents to create and maintain a civilian economy, and provided the
opportunity to do so. This happened, in some ways despite the destructive wars
that the countries endured; and in other ways because the need for better weapons
stimulated the innovations whose spinoffs yielded dividends to the civilian
economy.
Eastern Europe, including Russia, participated in that
development only marginally because these countries did not care much about
looting the resources of the colonies, or acquiring slaves to provide cheap
labor. As to the Western Europeans, they ended up fighting each other over the
riches of the colonies. This pitted Germany against the colonial powers that
managed to get America to fight on their side in two devastating wars.
To make a long story short, devious politics and
diplomacy allowed the Western Europeans and America to recreate and maintain
the consumer oriented civilian economies they had before the wars, while
forcing Russia and the other Eastern Europeans to get into the business of
protecting themselves from the Western threat by creating and maintaining war
economies that rested primarily on the production of war equipment and the
infrastructure that goes with it, and by spending time training to defend the
nation.
If all of that seems to make some kind of sense because
it connects all the arguments together, and provides answers to most questions,
the one thing it fails to do is answer this most crucial question: How is it
that the $60 billion Russian military budget is able to intimidate the nearly
trillion and a half combined military budgets of America and Europe?
The answer is that the comparison made between the two
military budgets, is as off-base as the comparison that’s often made between
the economies of the industrialized West, and those of the still developing nations,
seen around the world. To understand this part, we need to see how the law of
supply and demand applies (deceptively so) in determining the value of an
economy as measured by the Gross Domestic Product (GDP). Here is an example
that will shed light on how this artificial phenomenon works:
Sri Lanka has decided to industrialize and so, it
announced to the World that it is open for business. An American company opens
a textile factory that uses local natural resources to produce clothing for
children, which it sells primarily in America. A worker at the factory earns 100
rupees a day, which is comparable to what a sales clerk working for a
department store earns in Sri Lanka.
One day, a worker goes to his American boss and says: I
hear that you Americans say time is money. Yes, says the American; it is true,
we say that. Well then, says the Sri Lankan worker, I want to buy a watch to
know the time, to save it, and make money this way. And he asks the boss: Do
you make watches in America? Yes, says the boss, we make watches in America.
The Sri Lankan says: Can you order one for me? I saved enough money to pay for
one … I saved 1,000 rupees, says the worker. I’m afraid that will not buy you a
watch, says the American. He goes on: It costs at least 50 dollars to buy a
watch, and this comes to 10,000 rupees. What? screams the Sri Lankan; that’s a
hundred days work. Is there anyone in America that can afford to buy a watch?
Yes, says the American; everybody in America wears a watch.
The Sri Lankan scratches his head, then asks: Do sales
clerks wear watches in America? Yes, says the boss. How much do they earn? asks
the Sri Lankan. Those who sell the clothes you make earn 120 dollars a day says
the boss, which comes to 24,000 rupees a day. Wow! It will take 240 sales clerk
or 240 factory workers in Sri Lanka to earn this much. Why are things like that?
Don’t despair, says the boss, because I’ll let you in on a little secret. It is
that a Sri Lankan family can live on 100 rupees a day, whereas an American
family could barely live on 120 dollars a day.
Here is why things are like that. If you compare the work
done by garment workers in America and Sri Lanka, or the work done by sales
workers in the two countries, the rupee should exchange for 1.2 American
dollars. But, instead of this, the rupee is exchanged for half an American
penny. The reason is that more Sri Lankans want to buy American watches and
other industrial products, than there are Americans who want to buy made-in-Sri
Lanka clothes for children. This is how the law of supply and demand works.
Now, should large deposits of Rare Earth be discovered in Sri Lanka, and the
world rushes to buy them, the value of the rupee will rise, and everybody in
Sri Lanka will buy a watch. Until this happens, if it will ever happen, Sri
Lanka will have to develop its industries one factory at a time, and make the
watches and other industrial products to satisfy the local market in time …
maybe even produce surpluses that will be exported.
So then, how does this lesson apply to the story of the
Russian military as compared to the Italian economy? Well, when the comparison
is made between what Italy produces in total over a year, and what Russia
produces in miliary hardware every month, you find that the two are comparable.
The thing, however, is that there is great demand for Italy’s Fiats, wines and
pastas but not as much demand for Russia’s artillery pieces, nuclear bombs and
hypersonic ballistic missiles.
The bottom line being that aside from equipping its own
miliary, there isn’t enough demand in the world for what Russia produces, the
law of supply and demand shows how it distorts the true value of what nations
produce.
To reflect the true value of Russia’s unrealized
potential in the civilian field, the country must raise the value of its ruble
a hundred folds. To get there, Russia must concentrate on building a hi-tech
civilian economy that will produce what the world is eager to buy.
This done, the law of supply and demand will reflect the true value of the Russian GDP, which should be seen as 12 times that of Italy.