OK, this thread is a bit of a cheat, since I’m not an economist, and my knowledge of the subject is paltry. I am applying (my version of) common sense to these issues, but I’m aware that a lot of economics is counterintuitive. Therefore, I’ll set them up and people with a greater knowledge of the subject can knock them down.
Here’s what I’ve been thinking:
Our current (pretty successful) consumer-based economic model is based on growth.
A primary reason for it is the necessity for increased shareholder value: back in the day, it was felt sufficient to invest in a company and take the annual dividends. If the company’s profit remained steady, so did the dividends (in line with inflation).
However, most shareholders these days don’t seem to care about dividends. What they’re looking for is share value growth, above inflation. To achieve this (bubbles notwithstanding), a company’s rate of profit has to increase.
In order to do this, the company has to expand its markets and diversify products.
The vast majority of large companies following this model, but there is a finite market and pool of available funds.
Therefore for companies to remain popular and profitable, they must therefore rely on population growth, because a shrinking population leads to a shrinking economy.
Since the population is required always to grow (and this is encouraged at governmental level) to sustain economic health, it follows that the companies selling to the increased market are going to be utilising more and more fundamental resources: raw materials and food.
First: is this model correct? Second: if so, is it sustainable in the long term?
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*Originally posted by jjimm *
Our current (pretty successful) consumer-based economic model is based on growth.
Back in what day?
The reason our economy is based on growth is the simple need to take more out of something than we put in. If a company does not add value (vs merely shifting value around), what purpose does it serve.
A company has to grow and be profitable regardless.
Not really.
You are mixing and matching concepts. At the macroeconomic level, a growing economy is generally percieved as a good thing. The population tends to grow anyway so in order to maintain or improve the standard of living, economic growth must outpace population growth.
Also, a larger economy can support a higher population. Population is tied to economic growth and economic growth is tied to population growth.
At microeconomic level, competition encourages companies to grow and expand. A company that can produce more with less will grab more and more market share while crowding out less efficient companies.
I believe your question is that what keeps the economy and population from spiraling out of control in a kind of ‘feedback loop’?
Not necessarily. “Back in the day” means, say, 150 years ago. Someone would borrow money, set up a shop, employ someone else, pay off the loan (or dividend) and that would be it. They wouldn’t seek to have a transnational chain. The company turns a profit, but doesn’t expand. This is not growth-based.
I agree with Jjim. A company neither has to grow nor be profitable to stay in business.
And to the OP:
No I do not believe our current consumer-based economy is sustainable. In order for consumers to continue to have funds with which to purchase goods they must produce something somewhere. As more and more of the largest companies move production out of this country there will be fewer producers here, therefore less money with which to consume.
Eventually, one thing or another is likely to happen and our economy is going to collapse in on itself. Either our governement will go completely insolvent, or the level of unemployment will reach a critical mass and everything will fall apart.
What basis do you have for this? Yes, there are some disturbing trends (basically, the low, poverty wage sector of the economy is growing in proportion to the rest of the economy), but the general story you are suggesting is nonsense. Sure, some manufacturing jobs are moving overseas. But they are being replaced by service and intelligence based industry. The U.S. workforce is both very expensive but also very very productive. It may lose ground in relative standards of living as the rest of the world catches up, but there’s absolutely no reason our economy has to collapse just because industrial concentrations are shifting around in response to comparative advantage.
Here’s a basic story you are missing: a company that makes widgets moves it’s production to China. Jobs in the US are lost, and that’s bad. However, why did it move to China in the first place? Because it was cheaper, saving them money and increasing profit. But the effect of competition is to compete away that profit, leaving only the savings: the same number of widgets are now cheaper. That means that everyone who previously bought widget now has extra money to spend. That money HAS to go somewhere: into banks, in other industries, into buying more widgets. And the result is that some other sector of the economy must then expand in response.
First of all, half of all people are still employed by small companies(less then a hundred or so people), not mega -corporations.
Second, all business want to grow. Back in the day, growth was limited for a lot of mom and pop stores because they supported a small local population and lacked the infrastructure to reach beyond whatever town they were based in.
Third, the Sears Catalogue started in the late 1800s. There were plenty of companies that had a national presence.
I have pondered this for some time and don’t have all the answers. Best I can figure:
-Limits of resources and raw materials - We only capable of utilizing so much at any given time. There are only so many axes, fishing boats, drills, etc and only so many people to operate them.
-Natural forces that inhibit growth - disease, famine, violence as well as other forces increase as you cram more people together.
-Economic forces - as resources become more scarce and harder to acquire, they become more expensive. Inflation and scarcity can lead to some of the other negative forces I mentioned above.
Another question would be what happens when technology advances to the point where only a small portion of the population is required to meet the needs of the rest. Do most of us go on welfare? Do we work at pointless jobs creating crap that no one needs? I can forsee such a scenario not too far down the road.
One thing to realize is that when that day comes, everything will be very, very cheap relative to today. I, however, very much doubt that we will soon see an era where human industry isn’t profitable for a large portion of the economy.
This is true for many corporations, but not all of them. Many companies pay high enough dividends to justify their stock price, even without the stock price going up.
Right. Note that “rate of profit” means profit per share, not profit as a per cent of sales.
Usually true. However, a stable a company also has the option of increasing profit per share by buying back shares.
This would be true if every company succeeded. However, business is competitive. The most common way for a company to remain popular and profitable is to outperform other companies.
I think the increased use of resources would be taking place even under some other economic model. The population is increasing, particularly with legal and illegal immigration. Technology is finding more uses for resources.
I’ve discussed this above
That’s a darn good question. Will we run out of resources?
In the short run, we seem to be doing fine. Standard of living is increasing in most first world and second world countries. Apparently technological improvements are coming faster than resource depletion. In the long run, I don’t know. I worry about it – particularly world population.
Our economic theory is based on ignoring depreciation of durable consumer goods. How much do consumers loose on depreciation of 200,000,000 automobiles annually. How much since 1945? Didn’t the cars get added to economic growth when they were purchased?
Why not make acconting/personal finance mandatory in high school? Kiyosaki says it’s 7th grade arithmatic.
Appearently you haven’t heard of all the software development jobs and computer support jobs moving to india, the consulting jobs moving to Eastern europe, or all the data handling/entry and design jobs moving all over asia.
It is no longer just about who can make a t-shirt or a soccer ball the cheapest. Pretty much any job that CAN (read: doesn’t require a physical body in the states, isn’t a management position, and isn’t considered a threat to national security) be outsourced to cheaper labor overseas is being outsourced over the next few years.
This is especially true considering the vast improvements in education around the world, and the large disparity in the costs of living here compared to the the rest of the world (sans europe).
This is at least true of many Large and Mid Cap publicly traded companies. With an economy in flux they can no longer raise prices willy-nilly to increase profit margins, and they have already laid-off as many workers and cancelled as many projects as they can without hiring others (speaking generally of course). The options remaining require either outsourcing to cheaper labor, or messing with management, which do you think is occuring?
Except that they can’t lower the cost of the widgets to the consumer.
Let me explain. In a growth-centric, consumer-based economy like ours, for companies to attract investors, they have to show increases in profit margins, and inspire the belief that future increases will occur in order to attract investors (and get stock prices to rise). In a down economy, they cannot raise prices on goods to increase profit margins, so they look for increases in productivity/efficiency and decreases in costs. In your hypothetical, this means sending a widget plant to china. Thus lowering cost, and providing growth to their profit margin. While competition is always a factor (and ultimately if we had a completely free market would win out), the companies cannot afford to lower their prices on widgets because that would mean they have NO profit growth, and there goes those investors, they just moved to china to gain. So the companies will fight tooth and nail to keep the increased cost to the consumer as long as they can, and will only give up those profit gains when they have no other choice (or can replace them somewhere else).
And as far as the money the consumer may eventually save going to some other sector of the economy is concerned goes, with all the money being sent off shore for just about everything the american purchases (let’s be honest most aren’t serious investors here) it isn’t going to be a boon to some other sector of our economy. It’s just going to get funneled to some other widget factory in the third world.
Notice though, that I don’t consider this a bad thing. In my opinion, there needs to be a sort of reset or market correction in the world. While economics certainly isn’t a zero sum game, as long as the US’s cost of living and export production is so low compaired to the rest of the world we will continue to lose jobs and money overseas. While the american worker in many industries is far more effecient than anywhere else, their effenciency has long since been superseded by the increase in costs.
Um…yes thank you. It is obvious that you did in fact sit through the first day of accounting class.
Maybe you would care to explain to us just what depreciation has to do with the topic at had.
(jjimm - Depreciation is how accountants capture the loss of value of an asset over time. Everything a company purchases - machinery, plant, vehicles has a useful life span and everything eventually wears out. A new building or car is worth more than one that is 15 years old. Without capturing depreciation, a company would appear (on paper) to have assets worth much more than they really are.)
I’m happily aware of depreciation! I have a free home PC thanks to it. It’s better than the one I have on my desk at work, but apparently it’s totally worthless.
So, where does all the money come from that’s paying for the consumer goods? From what I’ve read, most consumers are in the employ of companies that are propped up by investor credit, and they’re using credit to buy stuff with to keep the economy running. Is this like some giant pyramid scheme?
It’s not a pyramid scheme, because the goods are real. The money is just a medium of exchange – pieces of paper and computer entries.
Money is used to determine who will own those goods. It doesn’t have to come from anywhere. The goods have to come from somewhere, and they do. They are actually being manufactured and distributed.
So it does rely on continual use of non-renewable resources, then?
Also, I’m aware that simply increasing the amount of ‘money’, i.e. currenct, available for use leads to rampant inflation, so the money does really have to be tied to something tangible.
By the way, I’m a strong free-market liberal - I beleive it’s the best and most natural form of economic model. It’s just in the back of my mind there’s a niggle that it won’t be able to last as long as it relies on inreasing population and resource use to grow.
As I said, I share your concern about using up resources. However, I think the causes are growing world population, improving technology, and growing world affluence. These would lead to greater use resources, regardless of the economic system. Note that the Iron Curtain countries had disastrous environmental policies – much worse than the US.
I don’t accept your cause-and-effect. My wife and I didn’t choose to start a family so that IBM’s stock price could go up.
This suggests not permanent growth but rather a sort of up and down (economically and population) with the down being pretty unpleasent…
Is this happening? Population has increased ever since.
Sure, I appreciate that at a personal level. I base my assertion on Italy and Ireland, both of which have suffered from economic downturn due to falling population. IIRC the Italian government begged its people to breed for Italy (of course immigration is another way to increase the population and therefore economic performance).
