What is clear about a modern industrial society is that it
needs to maintain a minimum level of economic growth to keep the population
satisfied. In the meantime, there are several ways to measure the growth of an
economy because many of its aspects tend to correlate to one degree or another.
However, the measure that counts the most is the indicator that correlates
growth with the economy's ability to absorb the new entrants into the labor
market. That is, when all is said and done, the level of employment is the
indicator that best determines the state of satisfaction in a modern industrial
society.
The question now is how to maintain the economy at a level
of growth that equals the increase in the labor market or do better. To answer
the question we first need to form a mental picture as to what an economy is
and how it works. An economy exists first and foremost to produce the goods
that fill the needs of society. And where goods are produced by industries such
as farming, mining, manufacturing, construction, industrial transportation and
utilities, a need is created to provide the kind of services that assist those
industries and help them perform the best that they can.
In an industrial economy, a need is also created for another
kind of service. It is that such economy forces onto society a hurried sort of
lifestyle that requires services of convenience ranging from fast food to
relaxation massages. It also causes the kind of stresses and diseases that require
a variety of preventative and palliative medical services – psychological as
well as physical. All of this makes the production and delivery of these
services an inseparable part of the economy. In fact, in a modern industrial
economy, the value of the services generally amounts to twice as much as all
the goods produced. Thus, we begin to define an economy by the potential of its
private sector to produce the goods and services demanded by the population.
And then there is the inevitable service known as government
which has several levels – from the municipal to the federal – and whose duty
is to administer the civic operations that range from the collection of garbage
to defending the nation against potential enemies. Government also administers
the redistribution of the wealth to ascertain that no citizen falls between the
cracks of the safety net.
But this is not the picture that represents the whole
economic equation because what is produced must go somewhere for the production
to be maintained. For this reason, the complete definition of an economy takes
into account society's ability to consume what it produces. What we have,
therefore, is an equation that is made of two parts: there is the production
side and there is the consumption side. We see from this that when the level of
production in goods and services is high in a given economy, the level of
consumption in this economy should also be high for the society to enjoy a
standard of living that is commensurate with its potential.
Alas, things are not always this simple. They were simple
enough for a short period of time at the start of the Industrial Revolution
when the countries that experienced the Revolution relied on their own
resources in raw material and in manpower to achieve growth. But things began
to change when the industrial economies of the time saw the need to rely on the
resources as well as the cheap labor of the societies that did not participate
in the Revolution. The industrial nations took the actions that helped them develop
their economies further, but these were actions that eventually came to be
viewed as politically unacceptable and socially abhorrent.
In any case, this was the time that the economic equation
was distorted. You had on one side of it a society that produced the least in
terms of goods and services yet consumed the most. But for the economic
equation to remain an equation, it must have two sides that equate. Because of
this, you had on the other side of it a society that produced the most yet
consumed the least. And what the latter produced which it did not consume went
to the former whose members spent their time doing military service rather than
produce the goods and services their society required. And this was the
distorted symmetry that the world has called colonialism or slavery and deemed
it unacceptable and abhorrent.
What happened after that was a reversal of sort. It is not
that the economic equation was corrected; it is that we now have a sort of
creeping colonialism in reverse that is upsetting the equation by doing the
same as before but doing it in the opposite direction. What is happening, in
fact, is that the advanced economies are made to pay for the habit of high
consumption they never gave up, by trading their inheritance for the goods and
services which are now produced in the emerging economies. While this is
obviously not the kind of balance that will correct the economic equation, it
is tolerated because no alternative has yet been formulated.
What all this means is that the current state of the world
economies is so convoluted, it would be impossible to discuss with clarity how
to achieve economic growth in a modern industrial society – be it a fully
developed economy or one that is still developing. And so, to discuss the
subject, we first imagine an industrial economy in isolation, one that relies
solely on its own resources in raw material and in manpower.
This done, consider the following argument: Growth is
achieved in an economy where you plow back into it a percentage of what you
produce. For example, in an agrarian economy, you do not consume all the grain
that you harvest in a given season; you save some of it and use that as seed to
plant next season. The same idea applies in an industrial economy except that
the operation is done not by setting aside grain or seed but by setting aside
money that ordinary people save rather than use it to augment their
consumption. The money thus saved is then borrowed by people who invest it and
help grow the economy.
All factors being equal, the more that a society saves, the
larger the growth that can be achieved. But when it comes to making a choice as
to how the money should be apportioned between the various parties, we find
that the parties are many, the factors they bring to the table are numerous,
and the conditions under which an economy may find itself are varied. Thus, we
realize that we face a daunting plethora of permutations from which to choose.
So then, how do we sort things out? And how do we combine the factors that will
lead to the correct choices? Well, the marketplace of a free economy has proved
to be the best allocator of resources, and we should continue to let it make
the difficult decisions.
But there is still the matter of having to decide what
percentage of the nation's production known as Gross Domestic Product (GDP)
should be transferred as taxes from the private sector to the government. And
when this is done, we must decide how much of that money should go toward the
building and continued maintenance of the soft and hard infrastructures of the
nation. Just as important, how much of the tax dollars should go toward the
entitlements and the safety net that some people call redistribution of the
wealth?
These questions are so important, we need to step back and focus
on a narrow aspect of the economic engine. It is this: What helps make an
economy hum is (first of all) the availability of capital – called money, and
(second of all) how easily this money is circulated through the economy – a
phenomenon called velocity of money. Thus, what matters is not who has the
money at any given time but who will make it circulate at a higher velocity.
That is, what matters is who will spend the money or invest it faster than
someone else? On both these counts, the government will outdo everyone else
which is why there should be no cause for alarm when the government raises the
tax rate. It will circulate the money out of its treasury as fast as it takes
it in.
Now, considering that the banks make money available for
borrowing to those who do not need it because they are wealthy to begin with,
and considering that the level of borrowing decides how much capital there is
in the economy, we see that the wealthy determine the availability of money,
which is half the formula that makes the economy grow. On the other hand, we
know that the less wealthy members of society have “a higher propensity” to
spend the money that comes to them – if and when it does – thus circulate it
faster; and this is the other half of the formula that makes the economy grow.
But we see a disconnect in that neither side gets the two halves of the
formula. And so, this is the area where we look for a solution.
We ask: Why is it that the wealthy seem to go on strike some
of the time, and sit on the money or invest it abroad rather than invest it
locally? It used to be that the wealthy borrowed money to start new enterprises
and hire people to make products and services that the local population was
eager to buy. But things have changed in this era of globalization, an era in
which the opportunities as to where the money can be invested are more numerous
and more varied than ever before, and where the returns are potentially higher.
But the people who chase those opportunities locally and
abroad are mostly financiers who push the papers and pull in the profits
without running any of the operations themselves. They could also be corporate
raiders, the kind that seek local enterprises going through a difficult moment.
They buy these enterprises cheaply, borrow against them with the pretext of
refurbishing them but then lay off the workers and prepare to liquidate the
enterprise.
They sell the parts of the company to the highest bidders
(usually foreigners who buy the production machines and the patents,) pocket the
money and look for the next opportunity. To accomplish all this, they would
have borrowed money that could have gone to medium and small enterprises, to
the people who would have hired locally and made the products that fill the
needs of the local population.
To reverse the situation and put an end to those destructive
practices, legislation must be introduced that will force the banks to lend to
the medium and small enterprises at a rate that is more attractive than what
the financiers and the big businesses get. Prime rate must be offered to those
who help grow the local economy while subprime rates will go to those who
exploit the bad situations and make them worse so as to get rich in the
process.
In some cases, the chance to borrow should be denied outright
to the people who have had a track record of malpractice in the field. All the
while, a good percentage, perhaps as much as 80 percent of the money lent to
businesses, should be allocated to medium and small enterprises as a condition
for the banks and the other financial institutions to borrow from the Central
Bank.
When this is done and the economy runs at close to full
employment, there will be more money coming to the treasury in the form of
taxes, and there will be less demand on it for the purpose of serving the
safety net. And no one will fuss about how much is collected in taxes or how
the money is redistributed.
Until this happens, the government should be there to help
those who need it so that the specter of what is unacceptable or abhorrent
never again loom over society.