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Archive for May, 2012

Paul Krugman’s NY Times article, Easy Useless Economics, brings to light a very important principle for problem solving—make sure you have identified the problem so you’re not wasting energy solving symptoms.

 

Perhaps a simple example will help explain.  Consider that the computer screen remains black when you press the on-button.  What do you do?  Do you initiate an investigation of the internal switching mechanisms?  No, of course not!  Instead of examining the switching assembly and all other internal connections you should first look at the basic source that provides the energy for it to run; you look to see if it is plugged in and also whether the outlet to which it is plugged is ‘hot’.  The most basic, and often the simplest approach, usually offers the best solution, so begin by asking the basic questions.  Don’t get caught up in the all the branches and leaves, until it is necessary.

 

Simply seek first to understand the root dynamic of the system before placing both attention and effort on what are most likely problematic symptoms.  Attending to the leaves—and they are numerous—before gaining understanding whether the root dynamic is operating as intended will have you twisting and turning in all sorts of ways.  You will waste a lot of time and energy trying to solve a problem you have never taken the time to identify.  The symptom will subside but the problem will remain alive and kicking only to bring forth another symptom in the near future.

 

Unfortunately many are blocked from following this principle simply because they allow themselves to be deceived by their very own thoughts (which are usually strongly held beliefs).  They tend to be good symptom reducers but not so good problem resolvers.  Believe it or not there are people who actually trust all the thoughts their thinking has produced—as if their way of thinking presents what is true, absent of error and bias.  And how do they know that what they believe is right?  Silly, their thoughts tell them so!

 

Back To Basics

Let’s return to the issue of Krugman’s article, the seemingly persistent high unemployment rate that is symptomatic of a depressed economy.  So the basic question is, is the root reinforcing cycle of the economy functioning as intended?  That is, is it plugged in to an active energy source and is there a sufficient flow of energy to turn the cycle?

The basic dynamic is the consumption-production cycle.  That is, consumption leads to the need for production, which in turn provides income for people to act on the demand (i.e. unmet or unsatisfied needs and wants) and consume.  As demand increases—which arises from unmet or unsatisfied needs and wants along with the marketing, advertising and sales efforts of business—then the need for more production emerges providing more jobs thus increasing the ability for more people with sufficient disposable income to consume. As money flows the cycle continues.

 

The question then becomes is consumption sufficient enough to cause adequate production affording enough people disposable income enabling them to meet their needs?  That is to say, is the cycle a positive reinforcing cycle or is extraction happening causing a decrease in money circulating throughout the system?

 

Causing an Uncertain Future

When the number of people employed is minimized the resultant level of consumption will also move toward a minimum, which will likely not be sufficient to support increased production and additional jobs.  So when business management strives to maximize its short-run gain by minimizing the employee’s gain, they are in effect diminishing the flow of money through the system, a system upon which they depend and thus have a need for it to be strong.  A strong economy means less uncertainty.

 

However, as more businesses follow suit in squeezing what they can out of people, that in time, the diminished flow of money through the economy will cause a weak and even possibly a depressed economy.  Not understanding having a laser-like focus on short-term self-serving gain often is the cause of future pain, business leaders might wonder why future prospects are not as favorable for them—and any everyone else for that matter—and perhaps place blame on outside factors for this uncertain future.

 

Currently although productivity has increased—more specifically efficiency, doing more with less—the squeeze on jobs has diminished consumption (demand).  Even though the need to consume is there, the means (income) to fulfill the demand is not.  Money is not circulating.  As metaphor consider the economy as a water balloon where at one end is the owner/capitalist and at the opposite end is labor/general public.  Squeezing the water balloon at the opposite end will cause the owner/capitalist end to expand, leaving no more water to flow from the labor/general public end.

 

Today we have a squeezed balloon: businesses have laid-off millions of people and have since re-hired very few.  The effect is that money isn’t flowing throughout the system. Corporate profits are up and so too is executive compensation.  Money is accumulating and expanding the upper end of the balloon. Accordingly the flow of money at the opposite end amounts to a few drops and a trickle and a trickle can’t possibly keep things going. Once you drain the well, water can’t flow.

 

The inequality in realized gains, especially since the 2008 financial crisis, has left a select few with hoards of money and the masses in debt with very little income for consumption.  Corporations have been sitting on a tremendous amount of cash that diminishes the amount of money circulating through the system.  Accumulating and hoarding money—keeping it all for one’s self—is counterproductive to maintaining a growing economy. Essentially the cycle is unplugged; trickle economics is a myth.

 

Role of Money

A critical role of money is for circulation through the economy, not merely profit accumulation, since it is through the exchange of money that the economy is sustained and accordingly the supply of money increases which is a requirement for economic growth.  Let us not forget that commercial banks add to the supply of money, not by holding and hoarding it as deposits, but by leveraging deposits in lending money to people and businesses for investment—it is this investment that circulates money and strengthens the economy.  The point being that the circulation of money is instrumental to the health of the economy.  If circulation is cut off to a segment of the economy then that segment will die leaving the economy less capable of survival—all segments are needed.

 

Until people are provided the means for which to fulfill their needs and wants, demand can’t be fulfilled.  The consuming public hasn’t the money to exchange for goods and services, to keep money circulating.  Since the public hasn’t the means, then someone else—that’s either government or corporations or both—must step up and invest to increase the flow of money in and through the economy.

 

Clearly things are not functioning right!  According to Krugman there are many economist advancing the thought that the problem with the economy is structural, not functional.  That there are plenty of jobs but there is a mis-match between the knowledge and skills workers offer and the knowledge and skills jobs require.  Really!

 

Shifting the Burden

When either experienced skilled people or recently graduated college educated people can’t get a job then we have to begin wondering exactly what kind of work corporations are now performing that they weren’t prior to 2008!  Just what are they doing that work/business-experienced and educated people can’t learn if provided the opportunity?

 

If the answer is that business now requires different knowledge and skills than it did prior to 2008, then what exactly has fundamentally changed in the work of the business? If the work has fundamentally changed since 2008, how can those who are leading it do so without themselves needing to learn the new business?  If the work of the business has changed so fundamentally why then aren’t the leaders providing the necessary training so that those with education and work experience can learn how to do what is now needed? Why don’t leaders want to invest in the future of their business?

 

If this is not possible, if the educated and experienced people available can’t learn what is required, then how is it possible that those who led these organizations prior to 2008 today have the knowledge and skill to do so in light such a fundamental change in the work of the business?  When and how did their metamorphosis occur?

 

Could it be that hiring people will increase costs and moreover hiring and training people will add even more costs?  Could it be that business leaders are simply viewing all costs as an impediment to securing maximum short-term profit for themselves and major shareholders?  Could short sightedness be the cause of the difficulty?  Could it be that the sole intent of the business minded is to make profit, not products and services, and so (to them) profit is profit no matter the means?  Could it be that business leaders seek only to feed off the economy?

 

 

 

 

 

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