In physics there are in a way two distinct universes within our own that haven’t been reconciled even now. The realms of the very small and the rest of the universe seem to operate on different sets of rules with quantum mechanics and its uncertainties dominating the small and the rest of the universe operating more on a mixture of Newtonian mechanics and Einstein’s General Theory. Brilliant people are still trying to figure out how these two seemingly irreconcilable sets of rules can be reconciled in a unified theory of everything. Einstein himself rejected quantum theory because of these seeming contradictions and what he viewed as its chaotic implications. I think economics has a similar problem.
If you look up definitions of economics from multiple sources you’ll find that many of them include the idea of allocation of scarce resources. Possibly the most famous phrase in general discussions of economics is “supply and demand”. But what about plenty? What about excess and the collapse of markets? On the PBS Newshour web site Daniel Alpert, author of “The Age of Oversupply: Overcoming the Greatest Challenge to the Global Economy,” presents an argument that much of the problem in the world’s current economy comes from too much of two of the linchpins of economics, labor and capital. He looks at how the entry of China and India into the global economy and the accompanying explosion in cheap labor, then available money as their middle and upper classes boomed and saved money has affected Western economies. He closes with this warning:
The great credit bubble may have burst, but the age of oversupply hasn’t ended — and won’t anytime soon. Abundant labor, excess capital, and cheap money are here to stay.
The expanding savings accounts of an exploding middle class represent only one reason, among others, that cheap money is going to keep flowing. Exports are another, as in the past. In fact, in the five years since the financial crisis, the foreign-currency reserve holdings of emerging countries have more than doubled, according to the IMF.
Via extraordinary monetary-easing measures, the developed world’s central banks have turned trillions of dollars of financial investments into so much cash that it is metaphorically bulging out of the pockets of banks and other investors. Yet it is not getting lent and it is not getting invested in new capacity. Why?
In a nutshell, the reason that the enormous ocean of liquidity is not being deployed is that there is so much global supply and excess capacity of labor, plants, equipment, and goods and services relative to present demand that there is little reason for private-sector investment in the development of additional capacity to produce additional supply.
What we have on our hands is a supply-side nightmare scenario.
It strikes me that almost all economists of any influence in academia, government or the private sector are like Einstein and many other physicists of his generation, rejecting the idea that their discipline lacks any meaningful way of understanding the consequences of too much labor, too much capital and the resulting lack of demand. Of course there are those that just don’t admit that these problems exist at all. Neither of these “schools of thought” will be useful in prescribing any policies that help the people and businesses that are being hurt because of the breakdown between reality and economic theory.