October/November 2012

WORLD ECONOMICS: A CONVERSATION BETWEEN JEREMY AND MELISSA

Jeremy Leonard: Melissa, in 1983, the year you were born, I wrote a thesis paper on the necessary and sufficient conditions for economic growth. At that time, there were no personal computers. I typed the paper and added all the math and graphs by hand. My, how times have changed! This month, on the flight from Alberta to Hawaii, I read my 29-year-old paper. Reviewing my thesis left me with the stark realization that our politicians have not changed their opinions of economics or economic theories since the 1930’s. They have yet to catch up with the knowledge of 1980’s undergrads!

Melissa Lopes: I was recently in Rio de Janeiro. Much of this beautiful city is lined with expensive hotels and restaurants. However, Rio is also home to some of the largest slums in the world and it is impossible to miss the vast poverty. 

As a child, I remember not being able to finish my dinner and being reminded that there are children starving in other parts of the world. Too bad those children were not within walking distance. As it was, I couldn’t give them the food off my plate.

In Rio, tourists can purchase tickets for safari style tours of some of the city’s poorest areas, full of hungry people. This is sad to me. 

More than 1/3 of the world’s food is either lost or wasted(1). Americans trash 40% of the food they buy. In India 40% of the food rots before it reaches the consumer(2). 

There are predictions of a food crisis in 2013. The prices of key crops are already rising as much as 25%. If these prices continue to climb, the number of hungry people around the world will also drastically increase.

What is going on in the world? Are all the developed countries really going bankrupt? I thought you economists figured out supply and demand in the 1700’s (and how to even out booms and depressions in the 1930’s). I thought we were only using a small portion of our capacity (4%) to grow food, so what is going to happen next? Will food get more expensive?

Jeremy Leonard: Our economies can and will grow stronger, and more of us will have more stuff (food being the most important stuff of all).

You are right: In 1935 Keynes published a book suggesting that the basic premise of efficient markets (popularized by Adam Smith in 1776) is false, and governments should normalize the highs and lows of the economy by spending borrowed money when times were bad (like the great depression), and taxing more heavily when times are good. If left alone, Keynes and others concluded, that the overall market might not recover at all.

My focus in University was figuring out how a country could get more stuff. I concluded that countries needed to focus their energies on supporting specific areas of their economy that would enable them to be the best producer or supplier of something that the world wants – think televisions (now being made in Korea) or resources, (now being extracted from Canada). This is happening, but economies relying on the price mechanism take a long time to adjust.

So what has been going wrong?

Most economists think that, recently, governments have been too quick to stimulate the economy by spending more than they are collecting in taxes. Whenever a country does this, there are only three things it can do to settle the bills it accumulates:

1. Collect more taxes

2. Borrow more money

3. Print money

Since step one and two both require the cooperation of others, sooner or later history shows that the solution becomes #3: Print money.

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” – John Maynard Keynes.

All the effort from governments to find some other solution will not succeed, and inflation will eventually do its job of paying the government’s bills with devalued money. This is painful and problematic. (Devaluing the currency makes all of us with savings poorer and all of us with debts richer.)

On a worldwide scale, I do not think that devaluation is avoidable, but taking that step will allow the world, as a whole, to get back on track. Each country or area will refocus on doing what it can do best.

I expect the world economy will end up being more efficient in the future. Real prices for everything, including food, will be lower.

We can still choose to eliminate hunger and poverty by supporting organizations and governments that share our goal, since there is already enough capacity in the world to produce food for everyone. – Jeremy Leonard & Melissa Lopes

 

Personal Notes:

In Grade eleven (1975), I decided that once I could support my family, I would then try to help eliminate systemic poverty in the world.

How is the family doing? I spent the last couple of weeks in Canada with my brother, Adrian (from England), and my children, Vanessa, Olivia, Anna, and Owen.

Now I am back on Kona (The Big Island, Hawaii). My kids: Paul (from Oahu) and Melissa (from Porto Alegre) are here as well. Even though my family has not recently had the opportunity to be all together, I have been lucky enough to spend family time with all my children. I am reminded that family is the strongest link and should be the backbone of our society. – Jeremy Leonard