“So we worshipped the Gods of the Market….

“So we worshipped the Gods of the Market who promised us these beautiful things…

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew…”

Kipling – “The Gods of the Copy Book Headings”

So… in less than two weeks, countries, corporations, small businesses, and huge numbers of individuals are facing economic ruin, not to mention the fact that virtually everyone’s retirement and portfolio have been trashed… and potentially a great deal more.

Why?

Covid-19 didn’t cause this. What caused this mess was the leveraging of greed at every possible level in human society.

Leverage is a great idea, in perspective. Who doesn’t want to get more for less effort, less investment, fewer employees?

Take just-in-time supply chains. They cut inventory costs because a firm doesn’t pay for components almost until needed [and the way some companies handle payment probably until after the components are already in a product on its way to be sold, if not already sold]. The company doesn’t maintain inventory for the government to tax [taxing inventory may prove to be one of the worst a decisions ever made in modern economic history]. There’s no cost for additional warehousing space. Ideally, that means a cheaper product [practically, it means higher profits and executive compensation].

Automation is another form of leverage. Improvements in technology mean that AI-guided systems replace human guided systems. That results in greater precision at lower cost and a smaller human workforce. Computerization is drastically reducing administrative jobs, which also has resulted in increasingly high workloads on reduced numbers of lower-level “executive” employees.

Outsourcing and off-shoring are other forms of leveraging capital, often essentially human capital, although they’re seldom described that way.

And, of course, raising money in the stock-market so that others pay for much of the capital in a company is also leverage. Again, I’ve never seen it described that way, but that’s what it is.

Then, add in specialization, where a few firms, perhaps only one or two, produce just one component vital to a number of firms…and spread this across not only the U.S. economy, but the world economy, and have an economic system the like of which the world has never seen. The only problem is that while all this specialization and leverage has enormous benefits, it also has enormous fragility, something that “the smooth-tongued wizards” of the Gods of the Market have ignored and downplayed. That’s a failure that the smooth-tongued wizards never pay for.

Unfortunately, we, as a society, will pay mightily for being seduced by the siren song of pure and over-leveraged capitalism, and for failing to recognize that we needed to master and restrain capitalism, rather than allowing ourselves to be mastered by it.

5 thoughts on ““So we worshipped the Gods of the Market….”

  1. M. Kilian says:

    Unfortunately it would seem you are on the money with this. Few people seem to realize just how low the abridged costs for what they pay for actually are nowadays, and just how fragile the production lines have become to sustain such.

    A self sustaining national economy? Perish the thought, it’s less effort to have somebody else make X for us.

  2. Richard says:

    Although we are all scared of the deaths and future at the moment, I wonder in long term it will cause more balanced societies to appear without the urge to have more of everything.

    It has certainly already reduced the pollution compared to this time last year, which helps the planet and ecosystems.

  3. Wine Guy says:

    In the US, “Just in time” ordering and lack of inventory for many items is practically demanded by the government because of the way that inventory is taxed against companies. Stockpiling any necessary item then falls on either the individual or the government. This applies to other areas of how tax code works for and against things: leverage is a good example. If tax rates were higher for short term and long term capital gains, leverage would be more expensive. Even manipulating the # of days that define short vs. long term capital gains would make a difference. If there is money to be made, business will find it… if there is money to be taxed, the government will find it, but only a few years after business has exploited the new cash stream.

    Railing against this is like blaming a compass for pointing north because the US does not have in place a system that rewards any business for taking the long view.

    1. I wasn’t railing — just pointing out the inevitable result of the way every party has designed for maximum leverage and profit. If the government waited to tax inventory until sold or incorporated in a product, after the first year the tax revenues would be at least the same, if not higher. Sometimes, maximum immediate greed actually is counter-productive.

  4. Hanneke says:

    Two articles about an alternative way to combat the economic fallout from the pandemic. These two are mostly about Denmark, but the Netherlands has similar support structures and regulations, and France has also decided along these lines. A lot of the more wealthy (north)West-European social democracies are taking this tack, to avoid their economies crashing. The EU specifically ruled that under these circumstances, this government support would be allowed, and the EU rules that would make this hard to do would be suspended.

    Doesn’t mean they won’t be vulnerable to the world-wide recession the other big players are steering towards, but it does make the crash less deep, less abrupt and less damaging locally.

    One from the New York Times:
    https://mobile.twitter.com/nytimes/status/1242352981271609345

    And one from the Atlantic:
    https://www.theatlantic.com/ideas/archive/2020/03/denmark-freezing-its-economy-should-us/608533/

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