Much More Than a Financial System Gone Bad

March 9, 2009

An Op-Ed column in yesterday’s Sunday New York Times by Tom Friedman portrays 2008 as an historic year of inflection when depleting natural resources collided with unsustainable demands for more and more stuff.  In the old regime, new stores forever sprouted to sell things built in developing economies like China, and money recycled into U.S. Treasury bills created the purchasing power that kept this “Ponzi scheme” running.  When the financial system misfired, the perpetual motion machine that gave the world historically rapid growth ground to a halt, but Friedman considers the financial breakdown merely a trigger in a “Great Disruption” that was inevitable anyway as both “Mother Nature and Father Greed hit the wall at once.”

In somewhat different language, Friedman is simply restating the fundamental issue of economics as a social science, which is how to resolve the conflict between man’s limitless wants and the scarce resources available to meet those desires.  More specifically, all systems from pure capitalism to a pure command economy must optimize three tasks: 1) deciding what to produce, 2) deciding how things will be produced, and 3) deciding how to distribute what gets produced.  From Adam Smith’s time, the scarcity of resources — labor, land, machinery, entrepreneurial know-how and natural resources — lay at the center of economics as a discipline.

So why does so much urgency and foreboding exist now, and why did a crisis occur at this time, rather than years ago or years into the future?  This is a $64,000 question, but let me offer two quick thoughts.  First, technology, which plays a role in economic development akin to sun and water to the development of life, is evolving now at metaphorical mach speed or even warp speed.  The pace of applied technology is too rapid to be harnessed safely.  Technology may be invented largely in the advanced world but has its most profound applications on the developing world.  Technology doesn’t have to be reinvented and enables developing nations to modernize much more quickly than was possible when today’s advanced nations were at a developing stage.  Shifts that took hundreds of years are being matched by equally significant changes that occur in three years or less.  And this evolution doesn’t take time out to consolidate before the next mutation changes everything all over.  At a nuts and bolts stage, the triggering device of the world crisis, a financial market meltdown, was a product of technological changes in data processing, communications, and complexity of synthesized financial market instruments.  The understanding of the new financial market infrastructure by politicians, central bankers, official regulators, credit rating agencies, and ordinary investors lagged woefully behind.

A second fundamental reason why the collision of forces described by Friedman happened now and not later involves the exponential growth of world population over the past century.  Mother Nature wasn’t hard-wired to handle such rapid population expansion.  The same ingenuity that lengthened the human life span must solve many complex problems for the planet to serve the bare necessities of Man and the whole ecosystem, and solutions must be found more hurriedly than the inventions that brought us to this point.  In this instance, time is not an unlimited commodity.  The clock will tick only so long.

But these are hardly novel concerns, and they do not supersede the imperative of fixing a broken down global financial system.  Without the latter, progress on the broader issues that Friedman mentions will not get very far.  People are questioning the viability of a capitalist economic system, and the restoration of confidence in people’s personal and collective economic futures should not be pushed aside as a subordinate matter to make way for more pressing  priorities.  Immediate goals to be addressed by the G-20, which meets April 2, involve capping unemployment, retraining workers, restoring credit availability, finding a bottom for equities, fortifying global commerce, and avoiding repairs that create new asset bubbles.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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