Are the cynics 'Doomsters'?

I have had another interesting comment to one of my posts, and I will reproduce the key parts below:
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'I have recently been discussing the economy with a friend of mine and I find it quite frustrating that whatever I say about the problems we face, he is of the view that the economy will be back to normal in a couple of years. I suppose what I particularly don't like is:

(a) It implies that he has some wisdom that I don't have. I'm just responding to the 'doomsters'.
(b) He sees nothing peculiar about ordinary people earning more money from their house than they do from their job, and that this is perfectly sustainable.
(c) He does not share my wonder at just how lucky we are (were) here in the West.'
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I like this comment because those of us who are cynical about the UK economy have probably had similar conversations.

Dealing with point (a) first, this is the idea that, somehow, the so called 'doomsters' are just bleating on about nothing. The root of such thinking is the complacency that comes from the attitude that, just because we have been doing well in the past, we will do well in the future. The UK has had a successful economy, and has been very successful, so there is nothing to argue with on this point. However, the question to ask of such people, making such assumptions, is on what basis would past performance guarantee future performance? The key part of this approach is to ask what it was in the past that created such economic success.

It is at this point that our friend may start to scratch his/her metaphorical head. It is actually not a simple question. If we start to examine it, we will start to consider at what point our economy did become a success, and need to ask why this happened, and why it continued to be such a success. The question gets really complicated.

One virtual certainty in the foundation of the success of the UK economy was that we led the industrial revolution. The trouble is that the reasons for why the industrial revolution took place is still a matter of some debate. If we then start to ask the question of why we continued to be such a success, the question becomes even more complicated. What does it take to make a country an economic success?

Of course, if there were a formula, then every country would be following it. As such, just in asking the friend the 'why' questions should, of itself, start to undermine the sense of complacent certainty that he/she holds. If we can not even agree on what made the UK successful in the past, on what basis can we be certain of success in the future.

At this point, it might be worthwhile to point out to the friend that, even if we were to be able to identify the cause of past success, and we could demonstrate that we were doing the same now as we were in the past, would our past approach work in the different world that we live in today?

It is only when these questions are asked that the complacency of such thinking really becomes apparent. Furthermore, when we do consider the changes that are taking place in the world economy, the lack of clarity of thinking of such optimists comes into stark relief. In particular we are now going through a revolution just as profound as the industrial revolution, in this case the IT revolution, and we have still not yet felt the full impact. To understand how such changes can have an impact, a good starting point is the humble clock. This simple piece of technology was a necessary antecedent for the industrial revolution, as time keeping is central to modernity. Just think of a railway timetable, the shift system in a factory and the impact of this taken-for-granted technology becomes clear. As another example, if we think of the introduction of electricity, it took many years before all of the impacts were felt, and many of the impacts were unexpected. For example it became to build single storey factories rather than multi-storey, creating a series of improvements in the cost of building a factory and also offering gains in efficiency in many industries.

On top of the technological changes we also have changes in the shape of the world economy. In the past there was, to put it simply, less competition. We now have new economic challengers in China, India, Russia and Brazil (the BRIC countries - I believe that in one of my last posts I may have missed out Russia - apologies for that), as well as the many other emerging economies. It is argued that the rise of this competition is, in part, due to technological change, a point of view that I will not disagree with. However, whatever the source of this change, the reality of the change is inescapable.

As such, if you have a conversation with a friend who exudes the complacency that it will all be OK just because it was OK in the past, I hope that my suggested line of questioning will give them pause for thought.

As for point (b), a few questions are again called for. If a person is earning more in a year from the increase in the value of their house than from their salary, what is the actual source of this wealth? Where does it come from? What source of growth is generating sufficient wealth to make such a massive increase in the value of an asset? Another way to ask the question is to ask what kind of wealth is the UK producing more of in comparison to the past. Is it manufacturing output or productivity increasing (in the case of productivity, it is increasing enough to justify this increase in wealth), is it an increase in the extraction/processing of commodities, are we selling more services overseas than previously, are we exporting more, are we attracting more tourist money than we spend as tourists ourselves, and so forth.

The answer that you may receive is some muttering about services, or the city. However, if we look at the value of services we have to remember that these are redistribution of wealth (this is too complicated to explain and justify here - see my essay 'A Funny View of Wealth' if you wish to grapple with this complex subject), not creators of wealth (excepting where the services are sold overseas or to tourists). If we look at the city, yes it has grown in wealth and power. This is reflected in the trade statistics that show an uplift in the balance of payments for services. However, on looking at the numbers, it becomes apparent that this is not significant enough to explain this apparent rise in the value of a property.

What all of this translates into is one big question mark over the source of the apparent increase in wealth. In order for an asset to rise in value (in a sustainable way), something must have generated the wealth such that people can afford this. The alternative is that people must be getting poorer as, if the cost of living in a home has increased, without an increase in wealth to support such an increase, then people are having to spend more for the same, at the cost of less wealth to use elsewhere (I would also like to cover the supply and demand issue, but that is again too large a subject for this brief review).

As for the final point (c) I had a similar conversation a few years ago regarding our good fortune. The person reacted very poorly when I suggested that we were the luckiest people in history - to have been born in the late 20th century in the Western world. I was told at the time that this was arrogant. Even now, I am very puzzled at this reaction. In my mind this was a simple statement of fact. We have long life expectancy, healthcare, excellent economic opportunities, security from most external threats, freedom and so on. Even now I find it odd that this would be a contentious point.

However, having said all of this, I am not sure that we can take all of this for granted any more. As I have already suggested, the world has changed and is still changing. The rising power of the East is a fact of life, and the impact of that rise is only now becoming apparent. It is for this reason that I argue against the complacency that seems so prevalent. Just repeating that 'it will all be OK' will not make it so.