An oft quoted line is that fish do not realise they are swimming in water because it is all they have ever known. When it comes to understanding our financial situation, we humans have become, to a significant degree, a little like those fish. Economic life has been transformed by two things that are, for the most part, invisible to us.
The first is what might be called increased transactionalisation. More and more of what we do is subject to monetary exchange. In the European Middle Ages most people would have known what money was, but many would have never used it. Now, money is applied to most of what we do.
This transactionalisation has been necessary to keep the capitalist system afloat. Stripped of all politics and ideology, capitalism is in essence based on straightforward arithmetic. There is a requirement for continuous ‘growth’ which, translated, means a continuous increase in the volume of transactions (GDP, the most common measurement of an economy, is a record of transactions). That ‘growth’ rate has to exceed the cost of capital, the interest rate.
As the Italian economist Mariana Mazzucato amusingly quips, if you want the economy to grow, then don’t marry your babysitter. The babysitter is paid, there is a transaction. The spouse is not. So although the same thing is happening, it appears that the economy is shrinking.
After the Second World War growth in developed economies came from a burgeoning population, the so-called baby boom, and the emergence of new manufactured products for which there was intense demand. But that period has long gone. Due to plummeting fertility rates and oversupply with most manufacturing products, an increase in transactional volume had to be found elsewhere.
For the last two decades of the twentieth century the solution mainly came from boosting the service sector of the economy, turning activities such as baby sitting into industries by ensuring money changed hands. This century, growth has mostly been derived from what is called ‘financialisation’: essentially finding ways to make money out of money (transactions out of transactions) usually by devising ways of creating debt. That is why in most countries debt is now at unsustainable levels and under rising pressure as interest rates rise.
'On the one hand more of our life is dominated by transactions, yet at the same time the bias towards transactions has concealed just how dramatic the improvements in human societies has been.'
Many financiers seem to believe the next area to create growth in transactions will come from adapting to climate change. Estimates of the sums involved range from $US80 trillion to $150 trillion between now and 2050. If true – it is speculation only and very unlikely to materialise – it would probably be enough to keep capitalism going for a while. But it is far more likely that a solution will have to be found elsewhere. Dismantling the energy system, perhaps the most important pillar of modern life, does not seem sustainable and it is no surprise that China, India, Russia and countries of the global south are not interested in moving away from fossil fuels.
The second area that greatly affects our lives, yet remains mostly invisible, is relentless improvements in industrial efficiency. The main engine has been computers, which is an enabling technology, not a product in itself. As the technology journalist Robert Cringely famously commented, ‘If the automobile had followed the same development cycle as the computer, a Rolls-Royce would today cost $100’ (he wrote that 20 years ago so it is probably $20 now).
There are many reasons why efficiency has improved so much, such as sophisticated supply chain techniques, replacing tangible assets with intangible assets, globalised production and a raft of other management techniques. But most of it has become possible because of digital technology, the combination of the internet and computer technology.
A moment’s reflection should make that improvement in efficiency obvious. Manufactured products that were expensive in the 1960s, such as furniture, stoves, fridges or televisions, now require very little financial outlay.
Why does this improvement remain largely invisible? One reason is a limitation of economics that is never acknowledged, especially not by economists. Economics is a discipline based on measuring transactions, not the reality that the transactions reflect. If an industry sector, say whitegoods, becomes more efficient then the result is that over time the price of the products will fall, especially if there is competition. When that happens total revenue also falls; the volume of transactions goes down. Economists, looking at that, will conclude there has been a loss of productivity – the exact opposite of what is actually occurring.
So ubiquitous are these economic measures the illusion has been created that transactions are the fundamental economic reality. They are not; they reflect reality. Money is a tool, not a master.
These two, mostly invisible, financial and economic phenomena run counter to each other. On the one hand more of our life is dominated by transactions, yet at the same time the bias towards transactions has concealed just how dramatic the improvements in human societies has been. When, as is likely, there are severe problems with the excessive world wide debt and the transactional system comes under stress, we may return to what looks, in terms of the economic statistics, like Great Depression conditions. But it will be nothing like the 1930s, when people struggled to eat and clothe themselves, because efficiency has improved so much. Those fish in water should still be able to swim.
David James is the managing editor of personalsuperinvestor.com.au. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.
Main image: Macro image of Banjo Patterson on the ten dollar note. (Getty Images)