BuSInESS
the Vanguard
noVember 3, 2011
Page 7
In America, hyper-consumerism doesn’t indicate product quality By Jasper Huang Vanguard Staff
America, once the image of prosperity, success and international affluence, is becoming senile and decrepit. Blasphemy, you say - and you are more than welcome to disagree - but many parts of the world are now forging ahead in technology, innovation and standards of living. I am in no way anti-American, but what is America still best at? Directly quoted from a recent post in the Harvard Business Review, “Consider this thought experiment. If you were really, really, really rich — say, not just part of the routinely opulent 1%, but a card-carrying member of the eye-poppingly decadent .01% — what part of your life would be American? If you had the money, I’d bet you’d drive a German car, wear British shoes and an Italian suit, keep your savings in a Swiss bank, vacation in Koh Samui with shopping expeditions to Cannes, fly Emirates, develop a palate for South African wine, hire a French-trained
chef, buy a few dozen Indian and Chinese companies, and pay Dubai-style taxes.” The message behind this quote is that if one could afford it, the niceties and luxuries one associates with him or herself would likely not be American. Take a look at a select few of the more recent and bizarre examples of American “innovation” and “ingenuity”: Spray cheese, designer diapers, 5,000 TV channels, oxymoronic “healthcare” and motor vehicle companies that woke up only on the brink of their demise. It is no wonder that, if given unbounded economic freedom, we would not associate ourselves with America. Sure, perhaps you would choose our military, Google and the iPhone over all other substitutes, but is there much more? What happened to America? It is not expansion and globalization, or the fear of “spreading ourselves too thin” that erased the history of American excellence, but rather a haughty arrogance coated with the icing of denial. Modern America has perfected the art
of mega-financing and ‘mess’producing, with side effects that may include unemployment, stagnation, and colossal debt. Mediocrity, backed by a little muscle and confidence, may have been a recipe for success in grade school, but upon one’s entrance into higher education and subsequently, the “real” world, it is the sharper, quicker, and wiser individuals that tend to prosper. Like it or not, America is no longer the sharpest, quickest, or wisest. With past cities of grandeur such as Baltimore and Detroit having areas beginning to resemble Kabul and Peshawar, it is impossible to ignore that we are no longer the best at everything under the sun, and what we are good at isn’t nearly good enough for the 21st century. Despite America’s huge deficit, dreadful trade balance, and dearth of exports, the above only touches on the superficial, the hyper-consumerism society that we have become. America may still lead in terms of where one chooses
For those who can afford luxuries, few choose American products or services.
to live, to start a business, to raise a family; these parts of many of our lives may be fundamentally American. Higher education (quality rather than access), science, computing R&D, finance (from sovereign and corporate debt to angel investors) and a variety of other ultra-high-value-added services are still helmed by America. To be certain, there is rot and decay here in America, but that rot and decay exists everywhere. That gleaming
Courtesy of arabmoneymatters.com
new Emirates fleet parked on the tarmac at the oh-so glorious Dubai International Airport is just a superficial consumer experience. It doesn’t mean that life is actually good there. However if the recent “rumors” and “signs” of America’s imminent demise are worth a bit of our attention, perhaps it’s time to diagnose the depth of the hole we have dug ourselves into and realize that America may need a gentle reality check.
The Austrian Business Cycle Theory: Unpopular and largely unknown
In 2001, the Austrian School of Economic Thought predicted the housing bubble crisis.
By James Pini Vanguard Staff
Few economists are ever inclined to notice Austrian Business Cycle Theory (ABCT) because the school of thought arose from accepts an economic methodology that is incompatible with today’s common schools of thought. Nevertheless, the Austrian School of Economic Thought has recently gained more attention, from both supporters and opponents – due to the fact that many of its adherents predicted the recessionary consequences of the housing bubble as early as 2001. Since I’m writing this article, you might guess I’m sympathetic to the school as a whole – and I am – but I don’t believe it should prevent someone who isn’t from considering ABCT on its own merits. As an example, even someone like John Hicks, the economist who helped interpret John Maynard Keynes’ The General Theory for the rest of us and set the standard IS-LM diagram that served most economics students for many years, gained some appreciation for the
Courtesy of tecnicalia.com
theory later in his life. To begin to understand the theory, you might start by asking the question: “Is there any connection between demand for consumer goods, and the demand for ‘partially-finished’ consumer goods?” In other words, “Is the ratio of wooden consumer products to lumber arbitrary?” Austrian economists say it is not arbitrary. To them, there is a very real and systematic interdependency throughout all types of production, so much so that to understand how the economy really works, you can’t rely on highly aggregated “total output” models that many schools of thought do. Instead, you need to work with models that disaggregate the production structure, and specifically in terms of time. Time refers to how long it takes a particular good until it is fully consumed. So for example, iron ore is usually very far away in time from being consumed. This is sometimes referred to as a “higher-order” good. A partly-assembled toaster is closer in time from being consumed–often called a “lower-
order” good. Austrians say the natural process of economic growth occurs in two phases: First, people save more of their incomes, which causes an increase in the production of “higher order” goods, while concurrently the production of “lower-order” goods (including consumer goods) shrinks temporarily. It is only after a period of time that more consumer goods come to the market, a direct consequence of the consumers’ willingness to save during the production process. The key is that during the “period of production”, consumers are consuming less–otherwise the necessary labor and resources presently being used in the “lower-order” sectors can’t be released to be made available for the new “higher-order” production. And it is this time-consuming dynamic that simply looking at the GDP, which measures yearly output of “fin-
ished goods”, doesn’t really catch. To get to the point, Austrians argue that artificial and significant credit expansions stimulate the production of more “higherorder” goods than can be supported by consumers–who are actually consuming more due to lower interest rates and temporarily greater incomes. This is an unsustainable dynamic since firms are acting as if the consumer goods industry is shrinking; they are boosting investment in “higher order” goods production as if more resources are going to be made available when resources leave the supposedly shrinking late-stage industries. In reality, because consumers aren’t consuming any less, these resources will never become available, and eventually the structure of production needs to correct itself. To the Austrians, the “boom” of the business cycle, induced by artificial credit
expansion, is actually the problem; it is the recession that is the unavoidable consequence. Accordingly, Austrians argue the pre-2008 boom in the American economy was precisely this unhealthy dynamic–the expansion of the “time structure of production” in an artificial and unsustainable way. I don’t have the space here to sufficiently provide their empirical evidence that illustrates it, but I would put forward a couple points: The housing sector–considered a “higher-order” goods industry since it might take 100 years to fully consume a house–began its expansion during the late 1990’s. It just so happens that the money supply noticeably began to take off in 1995. And secondly, as mentioned above, the Austrian school was calling the housing bubble a housing bubble as early as 2001. The majority of economists rejected that notion as late as 2007.