Abundance

The two fundamental forces in economics are scarcity and surplus. For most of human history scarcity has been most feared: the crop fails, food prices rise, people starve — Pharaoh’s seven thin cows. But surplus is damaging too: a farmer arrives at the market to find it overserved, prices fall, the crop is worthless, the farmer starves.

Currently, people are talking about the problems that come from Pharoah’s seven fat cows: robots will do all the jobs; streaming will kill the film industry; and, most commonly, central banks are flooding the world with money, distorting its value and leading investors to plough money into absurd business models and take unnecessary risks with your mother’s pension.

There’s nothing new about these worries. On New Year’s Day 1825, Samuel Thornton, a merchant, wrote in his diary that “the abundance of money has led to a variety of speculations in England, and scarcely a week has passed but some new company was founded to direct a world projected adventure. What must be the cure of this mania only time can show.” Inevitably, the Panic of 1825 followed after the discovery of one of the first and most flamboyant instances of securities fraud, the sale by Gregor MacGregor of government bonds for the fictional central American country of Poyais.

But let’s go back ten years and look at the debate that emerged following the post-Waterloo recession in the British economy. This recession led to the first attempts by economists to understand how abundance can be more damaging than scarcity.

Today recession is often characterised by excess supply. There is more labour and capital available than there is demand for what it can produce. As such, workers become unemployed and factories are mothballed, inventories are run down instead of new stuff being produced. So wages and prices fall and there is a general economic slowdown.

Classical economists rejected the possibility of a ‘general glut’, in keeping with Jean Baptise Say and his law that “production creates its own demand”, which said that everything produced is done so in order to exchange it for something else. Here is David Ricardo’s explanation:

Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected. Too much of a particular commodity may be produced, of which there may be such a glut in the market, as not to repay the capital expended on it; but this cannot be the case with respect to all commodities; the demand for corn is limited by the mouths which are to eat it, for shoes and coats by the persons who are to wear them; but though a community, or a part of a community, may have as much corn, and as many hats and shoes, as it is able or may wish to consume, the same cannot be said of every commodity produced by nature or by art.

This reasoning suggests it is possible for industries to suffer but not for an economy as a whole to slow down; the cobbler might struggle if there was less demand for shoes, but this was a boon for the milliner as he can now exchange fewer hats for more shoes. And likewise if more was produced than was desired in one sector then the excess would be saved and, as one man’s saving is another’s investment, spent by someone else.

But the more pessimistic Thomas Malthus disagreed. He pointed out that commodities could fall relative to the price of the means used to produce them, relative to wages that is. In addition, if everyone were to try to save at once then there would be a decrease in consumption and so production and income.

While the farmers were disposed to consume the luxuries produced by the manufacturers, and the manufacturers those produced by the farmers, all would go on smoothly; but if either one or both of the parties were disposed to save largely, with a view of bttering their condition, and providing for their families in future, the state of things would be very different. The farmer, instead of indulging himself in ribands, lace, and velvets, would be disposed to be satisfied with more simple clothing, but by this economy he would disable the manufacturer from purchasing the same amount of his produce; and for the returns of so much labour employed upon the land, and all greatly increased in productive power, there would evidently be no market. The manufacturer, in like manner, instead of indulging himself in sugar, grapes, and tobacco, might be disposed to save with a view to the future, but would be totally unable to do so, owing to the parsimony of the farmers and the want of demand for manufactures.

Karl Marx, dissented from both men. Marx argued that we could not ignore money and think solely in terms of trade in goods as Ricardo and Malthus did. His view is that the transformation of commodities into money and then back again allows for the possibility of a crisis and a general glut:

At a given moment, the supply of all commodities can be greater than the demand for all commodities, since the demand for the general commodity, money, exchange-value, is greater than the demand for all particular commodities, in other words the motive to turn the commodity into money, to realise its exchange-value, prevails over the motive to transform the commodity again into use-value.

Which sort of explains the modern economist’s stance that falling demand is deflationary: money increases in value relative to goods. Rather than being separate forces, surplus and scarcity are two sides of the same coin, goods are scarce relative to money or money is scarce relative to goods.

Joshua Brown, a New York-based wealth advisor, recently wrote a popular blog on the topic of abundance. He argues that we face a problem of abundance: there is just too much stuff everywhere. Central Bank largesse has led to dysfunctional capital markets, too much online noise has meant that only the noisiest and most outrageous can cut through, a tech bubble is disrupting legitimate businesses and replacing it with nothing that can last.

“The only way to save the economy is to crash it,” he says. The degradation of standards will be washed out — the seven thin cows will eat the seven fat cows.

There’s a certain perverse enjoyment in seeing grand structures collapse, but he mistakes a particular glut for a general glut.

Some sectors of the economy have a problem with abundance, when prices fall and producers suffer: fund managers who need yield, for example, or journalists who can no longer rely on advertising revenues. In other places, it is consumers who face a problem of scarcity and Mr Brown admits as much:

You can get a job but there’s nowhere you can afford to live that is anywhere near that job. You can create your own job but, absent access to capital markets, you can’t compete with those who have it. Plenty of hiring in New York and San Francisco. Good luck living there.

Rather than the general glut that Ricardo denied, we have the particular glut that Ricardo affirmed and right now that is doing some redistributing between different producers and different consumers — it is probably easier to feel confident at the moment if you work in construction rather than in the content business, although news has got more affordable while California real estate has slipped further out of reach.

A recession, however, would mean that everyone would suffer, the good business models and the bad business models alike, the few and the many — though it is likely the many would suffer the most, as they always do.

It was 200 years ago that the classical British economists wrote about recessions and neither they nor financial crises have stopped in those two centuries. A recession is coming, sooner or later and we will all likely live to regret the choices made in the seven years since the end of the financial crisis. But it is foolish to cheer this process on. We would be better to remember Joseph’s warning to Pharoah:

Seven years of great abundance are coming throughout the land of Egypt, but seven years of famine will follow them. Then all the abundance in Egypt will be forgotten, and the famine will ravage the land. The abundance in the land will not be remembered, because the famine that follows it will be so severe.