A meta-analysis of the economic crisis

It’s helpful when trying to gain new perspectives on a situation to elevate the altitude of the analysis. I thought I’d apply this to the current economic crisis by considering the study of economics.

Called a “social science”, economics bears similarities to other sciences in that it’s about describing coherent stories that explain what we see happening around us. Unlike traditional sciences, there’s no proof or disproof with economics. And taken to extremes, economics can collapse into being little more than competing ideologies (consider the great Keynesian-monetarist debates which have been recently reawakened).

The problem with relentlessly pursuing any economic ideology is that it lacks the nuance, balance and refinement to reflect the difference between theory and reality. Free market economics makes perfect competition its holy grail, unencumbered by government regulation. In neoclassical economics, perfect competition relies on actors in the market having perfect information and acting rationally on it. When has that ever been the case?

Consider the current recession, noted by some to be an “irrational recession” because it hasn’t been caused by either a resource shortage, or the bad-tasting medicine of interest rate spikes being used to stifle inflation. In fact, like the 2001 recession, it’s been caused by over-investment – in this case in real estate, last time technology. That hardly suggests perfect knowledge, does it?

And how can we get ourselves out of the recession? We could all really do with some solid consumer spending. But who’s going to spend copiously right now? We need individuals to take actions, which if taken en masse, would be for the greater good. But if you and I can’t rely on everyone else analysing the situation rationally and taking the same action, our risk in maxing out our credit cards is simply too high.

On the other hand, the government intervention of the Keynesian ideology isn’t a silver bullet. The problem is the difficulty with actually getting it right. Take US agriculture, for example. Since the 1970s, successive US governments have been successively whittling away the basis on which US agriculture was set up after WWI, by substituting the Ever-Normal Granary approach (which purchased surplus grain from farmers when bumper crops caused prices to fall, then sold that grain onto the market when bad harvests caused price spikes – thereby creating a self-funding stabilising influence on the national grain market) with a target price policy (under which the government paid farmers a top-up to a target price if market prices fell below) and then regularly reducing that target price. Because under this model, farmers are not incentivised to cut production when prices fall, US corn surpluses have grown for 30 years, leading to corn finding its way into more and more foods in industrial food production processes. The vast majority of the ton of corn that each American consumes per annum is not eaten as fresh corn cobs, cornflakes or tortillas, but as high-fructose corn syrup in carbonated drinks, modified or unmodified starch, glucose syrup, maltodextrin, crystalline fructose, ascorbic acid, lecithin, dextrose, lactic acid, lysine, maltose, MSG, polyols, caramel colour, xantham gum, and in the meat they eat owing to the corn fed to the livestock (including cows, which as ruminants can’t naturally digest grains). Poorly implemented market policies and regulation are having an immense impact on the American diet and the health of the population, which probably won’t even be understood for generations.

One of the reasons why the policies have been put in place is because agriculture as a sector just won’t conform to the free market theories of economics that have become so beloved of the leaders and influencers of the developed and developing world since the fall of the Berlin Wall. Unlike other markets, where price elasticity means that price falls increase consumption, agriculture just won’t work like that – peaks and troughs in production need to be managed. If farmers could work together sensibly, they’d cut corn production in the US significantly to arrest the fall in prices that they’ve been experiencing since the ‘70s. But like the distrustful consumers, who can’t rely on each other to boost spending, farmers also can’t rely on each other to cut production.

That’s why cartels, like OPEC, are formed, so that producers can share information and use it to manage what happens to the prices in a market. Free market theorists like Milton Friedman are fanatically opposed to this, but surely there has to be an application for it in some cases – like Fairtrade coffee production. And it is certainly the case that the over-investment in totally risky sub-prime real estate and the purchase of these sub-prime backed securities was the result of a fantastic failure to properly regulate the markets and demand transparency and accountability. And therein lies the rub: theories are just theories. They need careful analysis to work out if they actually apply, or to examine how they should be modified and adapted to the situation in hand. Once they become ideologies, the opportunity for that analysis is lost in a wave of fanaticism. Finance ministers around the world right now need to take care not to be fundamentalist about theory in dealing with the economic crisis, but instead employ the best mix of both the monetarist and fiscal tools at their disposal.

The role of digital in balancing the cycle

My two previous posts present a worrying possible conclusion to the way we’re living and the impact that we’re having on our own social fabric and environment today. It’s always easy to criticise and find the negative in our situation, so I’ve been thinking about what we can do to improve the situation, and what role digital should play in that.

First on the list is to inform people. Most people willingly choose the best for themselves and others when they are furnished with the information to do so, unless they absolutely can’t afford to do otherwise. But even affordability is a matter of priority. Who would knowingly choose to feed their children food that they knew to be gradually poisoning them and risking future debilitating diseases if they correctly understood and assessed those risks. These decisions come down to being well-informed. And that’s one of the things that the Internet and digital communications are best at.

Annie Leonard’s The Story of Stuff is a great example. I’m not sure how visitor numbers have changed over the last couple of months since I first saw it, but the “Over 4 million viewers” label is pretty impressive. It’s clearly been designed for grass-roots distribution.

Here’s another example:
YouTube is obviously a brilliant application for viral distribution, and so are many of the other social networking sites, like Facebook, on which the embedded video was shared by many.

Second is providing access to choice. Being well-informed isn’t enough if you can’t choose the better option. Being here in Canada has provided a clear example. Food products containing genetically-modified crops do not have to be labelled as such either here or in the USA. I’m not going to wade into the GMO debate here and now (although I might well enjoy doing so in the future), apart from to say that at the very least, consumers deserve the ability to choose whether or not they purchase GMO.

The cross-border, niche-market possibilities offered by the Internet make providing choice much easier, and enable consumers not to be reliant on the large, multinational corporations who dominate physical retailing in so many parts of the developed world. Instead, digital channels provide a platform on which local artisans can reach a market for their products, and offer alternatives to the existing distribution processes and market dynamics. Etsy is a great example of this. Now imagine this kind of platform applied to hand-crafted or artisan-designed and –developed goods from developing countries.

Third, and most importantly, is democratising access to power, which sounds incredibly lofty, but needn’t be. It’s about giving local people more input on the decisions that are made locally. Frequently, the most important of these are town planning decisions, such as, should Tesco be given planning permission to open an out-of-town supermarket here? Where I used to live in Southwark, London, I would receive three to four invitations to local consultations per year. The consultations were always conducted as town hall meetings – usually at about 6pm. They were almost impossible for people working up in town to go to. These kinds of consultations are the ideal forum to open up to digital channels. The more we open them up, the more we expand the exchange of information with the local community and allow them to have an active say in the way their towns develop.

The big sticking point with all of these things is the digital divide. It could be argued that it is those who don’t have access who have the greatest need for the benefits that digital access brings: a subject for another day.

Putting a value on the human effort in our stuff

Picking up on the urban migration thread, I’ve been researching what’s been driving that mass exodus from the world’s rural areas. In my travels, I came across The Story of Stuff, which I highly recommend. I love it for giving such a succinct explanation of such a huge and complex subject, for the wonderful way in which it’s presented (I wish more corporate presentations looked like this), and for the way it’s promoting grass-roots distribution of the message. In it, Annie Leonard explains the linear processes which determine where the stuff in our lives comes from and where it goes: extraction > production > distribution > consumption > disposal.

Our rate of consumption of Earth’s natural resources (in the past three decades, we consumed one-third of the planet’s resource base) is clearly unsustainable. And as multinational mining companies start moving into undeveloped and developing countries to exploit their resources, we’re now subjecting the inhabitants of those countries, in a much deeper and more significant way, to globalised economics. It’s no longer viable for them to sustain themselves off the land, and they are forced to work in mines and to move on to factories in urban centres to manufacture the products.

In developed countries, the economics of food production mean that the land simply cannot support small, specialist farms any longer. Instead, agriculture is an industry, the vast majority of it conducted on a terrifyingly huge industrial scale. (If you haven’t heard of Concentrated Animal-Feeding Operations or CAFOs, read this horrifying article by Raj Patel from The Observer Food Monthly, which explains them from about half-way down.) And so, even in developed countries, people are still emigrating from rural areas to urban conurbations.

As Leonard points out, the problem with this chain is that it’s not a cycle – it’s linear. We keep on taking good clean stuff out of the ground, but only putting toxic stuff back. (Even in agriculture, we’re taking the nutrients out of the ground and putting synthetic chemical fertilisers in, instead.) It’s totally unsustainable. And until we break the way that most consumers in developed (and increasingly in developing) countries see consumption as a means of fulfilment, we’ll never break the chain. We need to get back to valuing the human effort in the things we surround ourselves with. Good old artisan-crafted, high-skill, low-intensity local production.

Feeding our supercities

Have you seen 19.20.21.org? If not, take a look.



It’s an interesting, and well-presented, exposition of what it calls the “defining megatrend of the 21st century”: that by 2050 more than two-thirds of the world’s population will live in cities, up from 50% of the global population right now. And in 1900, it was only 3% of the global population. Have a look at the timeline provided on 19.20.21.org.

Aside from the fact that it’s a fairly staggering rate of growth, why does it matter? I’ve recently been learning the answer to that, in Carolyn Steel’s outstanding book, Hungry City: How Food Shapes Our Lives, in which she explores the historical relationship between cities and their sources of food, and projects an increasingly despairing future. As she says, there is an inherent contradiction in cities because they “shelter us but can’t sustain us”.

It was manageable when the scale of cities meant that the peripheral farming belt was able to produce sufficient quantities of food, distributed quickly enough, to feed the cities. But as cities have grown, their inhabitants have become reliant on an increasingly fragile distribution network to move food fast enough to get to us. And in the process, we’ve been put at the mercy of the global economics of supply chain management, and just-in-time processes.

These processes are the reason why when you or I go to Sainsbury’s or Choices or Wal-Mart, and find that there’s no more of our preferred brand of washing powder on the shelves, the sales assistants always answer that there’s no more in the back. Supermarkets don’t keep stocks in the backs of their stores any longer; they use those areas for cargo unloading. Instead, when their Point-of-Sales machines register that they’ve sold x items, they trigger an automatic stock re-fill request to the nearest distribution centre (probably somewhere between 50 and 100 miles away if you’re in the UK), and that item will be sent on a truck with whatever else is low in stock.

That might sound fairly reasonable, until you imagine the impact of some disruption to the distribution chain. It actually happened in Britain during the fuel strike in the summer of 2000. Those hauliers didn’t know how close they were to winning that battle; in fact they were only a matter of two or three days away: Britain was on the verge of nationwide food shortages precisely because supermarkets keep no stock. The huge quantities of food backed up in the distribution centres and simply could not get to the supermarkets – the points of sale. You can terrify yourself some more about what almost happened in 2000, and the other uncomfortable processes that supermarkets run in Felicity Lawrence’s excellent book, Not on the Label: What Really Goes into the Food on Your Plate.

So now, with an even greater exodus to cities, how secure is the future for city inhabitants and the food that they eat? The answer is: not very. Government no longer has any control over it. So unless you feel comfortable with putting Lee Scott (President and CEO of Wal-Mart) in charge of your food security, you might want to start informing yourself.

Food production, distribution and security seems a pretty glaring oversight on the list of things the 19.20.21.org project is going to consider.

Olympic cynicism

Friday's Beijing Olympics opening ceremony seemed to herald a slew of cynical comment in the press. For example, there was this from James Donaghy in the Guardian's Guide on Saturday August 9th:

"Compelling and beautiful, [the BBC's Damon Albarn and Jamie Hewlett-produced trailer is] everything the Olympics is not. It seems logical now for the Olympics itself to be animated. Given that the Olympian ideal of a drug-free tournament of plucky amateurs is total fantasy anyway it would merely be two fictions competing against each other with the animated version being infinitely more entertaining."

To be fair, I understand and agree with some of the arguments. The opening ceremony and the expense of running the Games, force one to consider some pretty tough questions about how best to use that much money. Arguments that sport shouldn't be used as a platform for politics, in relation to protest over China hosting the Games, are clearly overly simplistic. The well documented corruption and cronyism of Jacques Rogge's International Olympic Committee, are a disgrace from an organisation theoretically dedicated to promoting fair sportsmanship. And perhaps most of all, the inequitability of a self-funded amateur athlete competing on an apparently level playing field with a sportswoman with the backing of the full state machinery of a country like China, or the sheer financial might of a USA athlete, are galling.

Yet, that last reason, more than anything else is the reason why I, and so many others, still find the Olympics probably the most moving and inspirational of events. No matter who you are, funded superstar athlete or homegrown hopeful, the Olympics are still as important, as terrifying, and as much the pinnacle of your career. The Olympics represent stress, sacrifice, hard work and dreams for each athlete, and I find it both compelling and beautiful.