That title is a play on words and you’ll know what I mean by the time you get to the end. I had the idea to write this article while reading a piece written by Mr. Gordon Brown, the Prime Minister of Great Britain. The piece was titled "Don't Go Wobbly On Trade" and was published in the Wall Street Journal on May 28, 2009.
I know electronic circuits well, and the first thing that came to mind as I red the piece was to ask the question: "But where are the capacitors?" Let me explain. Anyone who is familiar with electronic circuits cannot fail but notice the analogies that exist between them and the system of economics. In fact, many words and letters that were thought to belong purely in the domain of electronics have found their way into the realm of economics, most notable among these being the Greek letter Beta.
In electronics, Beta is the factor by which a transistor multiplies the power of a signal. For example, if the manufacturer says transistor 3N6 has a Beta of 100, it means that if you feed this transistor a signal measuring 100 milliwatts at the input terminal called the base, it will deliver that same signal, now measuring 10 watts, at the output terminal called the collector.
Similarly, traders on the stock market use the word Beta to refer to the extent by which the price of a stock tends to change. For example, a stock that has a high Beta is one that changes in price by a large amount in a short period of time. The people we call day traders love this kind of stock because traders make money when they buy the shares at a low price and sell them at a high price. And the wider the range between the lows and the highs of a stock, the bigger the gains that a trader stands to make.
Another important factor comes into play in this game; it is the frequency at which the price of the stock bounces back and forth between the low point and the high point. Frequency is known in mathematics as the reciprocal of time which means that something happening at a high frequency takes little time to repeat itself. And those who like to make money love to make it frequently as if money came to them in waves after waves.
Now, to say that something happens fast means that it has velocity. And this is a word that is used in economics. It is used in relation to the money supply as in "velocity of money". This expression refers to the frequency with which the money supply turns over in a given economy. But in his piece, Mr. Brown invoked the notion of velocity in a different context and without actually using the word itself.
The Prime Minister called on the nations of the world to refrain from taking protectionist measures in matters relating to trade. Protectionism, he says, would restrict trade, lead to a recession and maybe even a depression. What Mr. Brown is advocating, in effect, is the unrestricted flow of goods and services between nations, something that will undoubtedly increase the velocity of world trade.
Mr. Brown’s idea is one that must be juxtaposed with another idea because they are both cut from the same cloth, so to speak. This other idea is called the "just in time" principle and it is employed in manufacturing whereby the parts are delivered to a factory just in time for their use in the assembly of the products. The application of this principle adds to the velocity of production because it eliminates the time it takes to store the parts. And what must not be lost on anyone is the irony that the Japanese introduced the principle to their manufacturing processes just in time before the crash of their economy at the start of the so-called lost decade for which they have become so famous.
Let’s now get back to electronics and see how all this ties together. The designers of electronic circuits know they have to make a trade-off between two important issues every time they do a design. On the one hand there is the frequency response of the circuit, and the preference here is that it be high which means you want things to happen with considerable velocity. On the other hand there are the unwanted ripples which cause distortion in the circuit and therefore must be smoothed out or eliminated. But here is the difficulty: In almost every circuit that you care to design, to reduce one problem is to worsen the other hence the need to make a trade-off between the two issues.
In audio, a high frequency response is what gives you a clear sound. In the visuals, high frequency is what gives you a high definition and the quick response to the keystrokes of your computer. But the downside of high frequency is that the circuits are difficult to stabilize. Thus, any weakness inherent to the design or any stray signal entering the circuit from the outside will spread throughout the circuit and render it unstable. This will distort the audio, the visual and just about everything else you do with a circuit. You can reduce the problem by adding capacitance to the circuit but this is something that will slow it down. And this is where you have to make the trade-off as indicated already. Notice that the word capacitance and not capacity was used here, as there is a difference between the two.
Capacitance is represented by the value of a capacitor. In electronics, a capacitor is a component that performs the function of a non-chemical mini battery. Sometimes it is charged with current and sometimes it is drained of it. The charging and discharging of a capacitor can take a few minutes or it can take a fraction of a nanosecond. To obtain this range of values, capacitors are manufactured in different sizes and they are used in various ways inside a circuit. Like a storage space, a capacitor absorbs the excess electrons when there is an excess of them; and releases the electrons when the circuit is starved of them.
Something similar happens in business and in trade. Indeed the world still suffers from the fact that the distortion which began in the American economy was rippled through to the other economies by the speed of execution brought about by none other than the speed of modern communication. The good news is that some economies did relatively well considering the circumstances and despite everything that went wrong. And there was a reason for this; it is that these economies had capacitance in their business circuits.
In economics, the equivalent of the capacitor is the storage facility whatever its shape and whatever its measurements. It can be the warehouse, the wallet, the silo, the pocket, the fuel tank, the bank vault, the purse, the shelf, the freezer, the pantry, the safe, the refrigerator and so on where we keep reserves of any kind and any size. If you take these reserves away and make everything operate "just in time," you will have no cushion to fall back on and thus risk making the economy unstable. Yes, having a cushion slows down the economy but it eliminates the risk of instability. And so, you can choose how much of one you will tolerate to reduce the effect of the other but in the end you will have to make that trade-off.
When it comes to the service industries such as banking and the other financials, the need to have reserves is even more apparent and more compelling. In fact, no one who has lived on this planet in the past little while would deny the claim that the absence of adequate money reserves in the financial institutions is what caused the crisis the world has just experienced. These enterprises levered their operations highly to give themselves a high beta performance but they neglected to add capacitance to their circuit. The result is that they became unstable and they pulled the world economy down with them.
I must now explain something to avoid the confusion that may be generated by the similarity in the two words capacity and capacitance. Capacity refers to the potential of an enterprise to produce and deliver a quantity of goods or services. For example, an auto plant that is constructed to assemble 100,000 cars a year is said to have this capacity. If it produces say, 80 000 cars a year, it will be said that the plant is under utilized and has a spare capacity.
As for capacitance, it was defined earlier and was shown to be the reserves that we store and then use at a later time to cushion an operation. We draw on the reserves during the bad times to make up for a shortfall that may creep into the system, and we replenish the reserves when there is a surplus during the good times.
To conclude, yes we must have trade between the nations like says Mr. Gordon Brown, but we should have it where we need it and only when it is useful. We do not need unrestricted trade just for the sake of having it, and we do not need it at any cost. In the meantime, having gone through a serious crisis, the world needs to take a breather at this time and allow ourselves to "recharge" our mental batteries.
We must do this because many economies still face the potential to be distorted; and we shall need time to think of the best way to add capacitance to them. This is necessary in order to smooth things out before we rev up our frequency generators, something that will speed things up and risk multiplying the existing problems. Failure to act will cause some deficiencies to creep into the world economy and will send us back to square one if not do worse.
Now, about that title. In the colloquial of North American English we sometimes pronounce the word "better" to sound like "beta". Thus to say: "Beta have some capacitance" means better add storage to our economy and fill it with reserves.