Monday, April 13, 2009

Restructuring of the world economy

I think that the capacity of the current economic structure to grow has almost run out. Let's say you have a certain capacity to run. Utilising that capacity at the lower levels is easy. As you move towards the higher end of utilising that capacity, the effort (mental determination) required is greater and greater. But beyond the limit of that capacity no amount of effort (mental determination) can do it. Towards the fag end of the capacity of the current structure of the economy to produce, we've seen an unprecedented use of capital (and financial innovation) to drive growth. And then came the collapse, where no amount of financial innovation could drive the growth anymore because the productive capacity of the economic structure had been almost exhausted.

The world economy will probably settle down at a lower level. Current world economics will have to undergo restructuring to Build new and additional productive capacity. Much like the runner who failed to reach his objective, must go back and work at building a new level of capacity. 

How much growth the next cycle will produce, would depend on how deep this restructuring is.

So the question is - what is the possible direction the economy will take? I get the idea as I pick my tooth brush up this morning. I'll be discarding this tooth brush in a matter of few days. It already seems like I have used it beyond its effective life span. But then I will be discarding the the whole tooth brush when it's only the bristles that need to be replaced. The rest of the tooth brush (the handle etc.) is actually just as it was when I first bought it some weeks ago. The point is a lot of the 'things' that we buy and use today were designed at a time when the constraint on resources was not a factor requiring much consideration. These 'things' have become misfits in today's world. 

Many a successful innovations since the start of the industrial revolution (and even before) need now to be replaced. Indeed the success of the Industrial revolution itself might have hastened the need to discard them. Improved purchasing power (due to cheaper manufacturing and financial innovation), spreading prosperity (due to expanding trade) and population growth (on the back of better health care) have ensured a continuous growth in the demand for these innovations. But then these innovations were never designed with the impact of very large scale usage in mind. Take for example the personal Automobiles, designed for user convenience & improved quality of life, the falling costs and rising purchasing capacity have resulted in such wide spread use of this mode of transport that it now is negatively impacting the quality of life (not just of the bystanders but the owners themselves). 

Having stretched material supply to exhaution, we now need new innovations that are resource efficient, sustainable, and renewable. The economics of scale itself might be on its way out. So also the life styles of the 20th century.

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