6

     A HOUSE OF CARDS
    
    

 

EVERYONE has heard of inflation and unemployment – they are almost always in the news – probably because politicians and economists don’t really know what to do about either of them! THE BALLOON GOES UP!      Inflation is steadily rising prices – not just some going up and others going down, but all or most going up together. This includes wages and salaries because they are the prices people put on their skills and their labour. But why does this happen?      Let's go back to the idea of money. Money is a measure of the value of things we want. In the old days, people who wanted to sell and people who wanted to buy came together in the market. The market was a very good way of working out prices – because of supply and demand and competition. Fair prices were almost guaranteed.      If you wanted to buy some fruit, you could look around until you found the person selling the best fruit at the best price. It was the same with eggs, milk, pots, pans, weapons, clothes, and everything else that people could want. All important needs were supplied. Things in short supply cost more, things that were plentiful costs less. But inflation as we know it today – ALL prices going up together – was almost impossible.      Inflation could only happen then if there was an increase in the supply of the basic money. After the discovery of the Americas, the mines of Mexico and Peru poured a large quantity of precious metals, mostly silver, into Europe. (It came from Indian labour in the mines, not from the accumulated treasure of the Aztecs and the Incas.) In consequence, all prices were very high, because the value of the ‘plentiful’ money was low.

‘BATTERIES NOT INCLUDED’      Nowadays, the things we want are marketed in a much more aggressive way and many different forces affect the prices we have to pay. If you wanted to buy the very latest video game, you would have to pay the price the shop was asking, because the makers of the game and the shopkeepers will have agreed, AND advertised, a recommended retail price.      This control of prices is quite recent. Since big businesses started buying up other businesses and forming themselves into big corporations, they soon found they could charge more or less what they liked for the things they produced.      Most businesses are employers, buyers, sellers and money makers. Somebody makes something, buys something, or does something, and sells it to someone else for money. ‘Sales’ means money coming in, ‘costs’ means money going out, ‘profit’ or ‘loss’ means the difference between sales and costs. The bigger the business, the more important it is to a country's economy.      When a big business owns the factories where your favourite video game is made, AND the chain of shops that sell it, you can see how easy it is for them to sell it at a high price and make a large profit – because they have no competition. This is called a monopoly.

UP, UP, AND AWAY!      When enough prices start to rise in this way, people soon start to demand higher wages – the price they charge for what they do.      The big corporation can afford to meet their workers' demands, not only because of their big profits, but also because they can control their prices. They can pay their workers more, put up their prices – thus passing on the cost to the consumer – and still make the same profit.      Many workers belong to trade unions, organizations that represent their interests, but not everybody in a trade union works for a big corporation. When a trade union successfully demands a pay rise, all the other members are entitled to it. Very often smaller businesses employing union members cannot pay these increased costs. They either go out of business, or reduce the number of people working for them in order to cut costs. Either way, this means a lot of people lose their jobs – in other words, it causes unemployment. WHO'S TO BLAME?      Some small businesses, operating on borrowed money, have to borrow more money – if they are to do the same amount of business at the higher prices – just to keep going. So the banks, along with the extra spending power of those with higher wages, also increase the money supply by lending more money.  This also adds to the inflation.      So, banks shove up prices, wage demands shove up prices, and large corporation pass the higher costs on to the public because they can control their prices in the market AND make the same margin of profit. This upward wage/price spiral is the central cause of present-day inflation – the steady rise in ALL prices.

What can anyone do about it? Very little it would seem. Trying to control wage rises and prices is unpopular with nearly everyone because it stops the great social desire for higher consumption. All of us want more of the good things in life.      Even so, most people would agree that it is a sad fact of life that today the only way of reducing inflation seems to be at the cost of very high levels of unemployment – throwing a great many people out of work in order to keep everything else going.      THIS MEANS YOU!      The vast majority of people have never owned the means of creating wealth. For centuries they have had to sell their labour and skills in return for wages simply in order to buy the things they need.      They have no land – nowhere to build, nowhere to grow their own food – they can only seek employment from those who control the means of production. All these people have to have money simply to be able to survive within the laws of property ownership and let's face it, such laws were hardly drawn up with their interests in mind!      Remember, because it can be bought and sold, human labour is also a commodity and if there is no demand for what you can do, you can become unemployed.

IT'S ONLY HUMAN NATURE      The word recession has been borrowed by politicians and economists – it means: ‘the action of receding, withdrawal, retirement, or departing.’ It may be safe to suppose that in economic terms it generally means that things are bad, but when politicians says we are ‘bouncing along the bottom of a recession’, anyone can be excused for not knowing what they are talking about!

However, it is well known that politicians and economists often disagree about what causes what and who is to blame for things going wrong. In 1936, John Maynard Keynes wrote a book called The General Theory of Employment, Interest, and Money. Many experts call him a ‘bighead’ and a ‘self-publicist’ but grudgingly admit he is mostly right.      Keynes assumed the possibility that natural economic processes – like recessions and booms – could be cumulative (added to) rather than compensatory (counterbalancing). That is to say, once an economy started moving in a different way (up or down, forward or back, receding or advancing – take your pick!), then that movement would get stronger, not weaker, according to how people reacted.      This, he reckoned, was because of human nature. As consumers, savers, and producers we all tend to be short-sighted and selfish as well as the victims of greed – our own or someone else's. We are constantly surprised when our plans don't work out and disappointed when we don't get what we want.

MISERABLE MISERS!      How much we buy or generally use up as consumers depends on how much money we have in our pockets – if we're lucky enough to have some to spare, we might want to save it. If enough people decide to become savers – even though there may be plenty of things in the shops they could easily buy – this can slow down the economy and confuse the producers. They tend to be cautious and judge future demand, or how much they should produce, on how much people are spending now.      People save money – and we are often told that this is a good thing to do – so that they can earn interest from the bank or building society that looks after their deposits. They can watch their money grow.

The producers do not see that some people might be saving simply to be able to buy more of their product at a later date, when they feel they have enough money put by.      When, and if, this sudden demand comes along, the producers are frequently unprepared – the things they sell are in short supply – forcing prices up and probably canceling out any interest the savers might have earned. Even worse, when they first noticed that people were saving and not spending, the producers may have laid off workers in order to cut costs! Thanks to human nature, just about everybody loses.      MOTHER HUBBARD'S CUPBOARD      Naturally, how much we consume also depends on how little we have in our pockets. If nobody bought anything – apart from the bare necessities of life – it could turn a minor recession into a full economic depression (Another borrowed word meaning: ‘A lowering in quality, vigour, or amount; the state of being lowered’ – if a recession is bad, a depression is terrible!)

A depression happens when a great many people suddenly find themselves out work. Through no fault of their own, they are forced to live on a reduced income. They immediately have to stop spending at the rate they could when they earned a wage or salary. But they still have to pay their bills – and while they may get some money from the government, it is certainly not enough to keep them at the same standard of living that they were once used to.      They can no longer afford bikes for birthdays, cars, holidays, or even fashionable clothes. They may even have to lose the house they were buying on a mortgage.

A mortgage is just another way of borrowing money – if for some reason you can't pay the money back, the lender can take your house or property instead of the money.      In a depression, just about everybody suffers. Banks lose to businesses that collapse owing them money, shops close owing to lack of customers, investors have no confidence in new businesses, and those still in work are generally taxed higher so that governments can ‘pay’ the unemployed.      Unemployment is very expensive for a government – it is curious that while so many people are paid to do nothing, those still in work have to work harder to keep up productivity!      But the hardships endured by those who can still earn a living are nothing compared to the misery of being unemployed. The Great Depression took place in the 1930s, and today the arguments still go on about how to get a country out of recession. Some talk of getting inflation down, others talk of ‘consumer confidence’, ‘sustainable growth’ and ‘wealth creation’, but what they are all hoping for is some kind of boom to happen.

THE KLONDIKE FACTOR      If anyone knew how to create a continuous boom, they would have done it a long time ago. A boom is rather like a ‘gold rush’ – suddenly something valuable and in short supply becomes available. Towns and businesses spring up all around the area where ‘gold’ has been discovered.  People get rich and start spending their money. For a while it lasts, but then the ‘gold’ runs out.      In the mid-1980s in Britain, home ownership boomed and property prices soared. People were encouraged to borrow money against the new high value of their homes and spend it on luxuries they had always dreamed of. But like the ‘gold’, and the real sixteenth-century silver from Mexico and Peru, the borrowed money, or credit, only increased the money supply and the value of money went down just as all prices steadily went up – resulting in inflation and unemployment and the recession of the late 1980s and the early 90s.      Who knows when the next boom – ‘A start of commercial activity; a rush of activity in business or speculation’ – will happen?

Meanwhile, money-making, industry, and consumerism have grown so much that they are now threatening the very environmental resources of the planet that all living creatures depend on for their basic survival. This is why politicians and economists keep talking about ‘sustainable growth’. It is a very complex problem indeed.      How long can the planet supply all the raw materials we turn into things we consume? How long can the environment put up with all the pollution pumped out by the industrialized nations? Why do the ‘developing’ countries want to expand in the same way?

The whole world seems to believe in economic growth but is there enough to go round? Is the basic greed of making money shaking the very table that supports the ‘house of cards’? Wow! Read on . . .