‎"You can fool all of the people some of the time, You can fool some of the people all of the time, But you can't fool all of the people all of the time."
[Abraham Lincoln, 1864]

Saturday, July 2, 2011

Conflicts, Wars, and Scarcity

by Amalul Malek Shah

How did we get to where we are right now? What are the incentives driving our very own unique individual behaviour which if taken from the macro perspective, would show a recognisable pattern, hence the term in statistics, ‘normal distribution’? Why is it that after two major world wars and the emergence of global institutions that has been practicing binding multilateral rules to govern the conduct of nations such as the UN, WTO, G7-G20, IMF etc. are we still failing to, if not eliminate, minimise the occurrences of wars, trade protective measures, and financial crises which have detrimental effects on the welfare of the masses? My observation has led me to believe that the root cause of much of today’s reality is the very core idea behind the whole field of economics; the concept of scarcity.

The fundamental problem that economics seeks to solve is how to satisfy unlimited wants when resources before you are limited, fixed, and scarce. The concept obtains its merit from the logical explanation that the earth’s resources are fixed since the earth itself is a finite mass, and the resources are slowly diminishing in quantity the larger the population is. For illustrative purposes, imagine a small community representing earth, and the houses within it representing nations. At the micro level, as more people live in a house, the more electricity, food, water etc. (here termed ‘resources’) they consume. Under the assumption that no one in the household replenishes the stock (Olson’s logic of collective action applies here), not only are the ‘resources’ fixed, it is deficient in quantity when compared to its demand, so it is scarce.

One can predict from the household example above that when their resources begin to diminish, rational individuals will either practice the rule of the jungle (might makes right), invade and steal other houses’ resources, get a few other neighbours with vital resources to cut the supply so that they have more resources given to them in exchange for their higher priced resource, or simply cut off competition for resources by destroying your neighbours, or, when there are two equally powerful houses with sharply contrasting ideologies on how the resources should be managed, engage in a wasteful attempt to increase the sphere of influence in the community so that the other backs down, or when that is not successful, form a committee to promote the idea of a ‘new community order’ that governs the conducts of all households for the benefit of the community.

However this final outcome shouldn’t be perceived as the light at the end of the tunnel, as long as all houses believe that resources are scarce, temptations in the short run to profitably deviate from a mutually beneficial outcome will always remain high for a house or a small group of houses (refer to ‘The Prisoners Dilemma’). As you have probably noticed right now, all of the above scenarios in our hypothetical community have been or are still happening, and all are perfectly ‘rational behaviour’ in economics, and ‘best responses’ in Game Theory. Why? Because of the concept of scarcity as the driving force of their behaviour.

To show its significance in economics, the law of demand and supply is founded on the concept of scarcity – higher demand for something fixed in quantity will drive the price up as different people compete to outbid one another, lower supply of a fixed quantity creates the same effect. Even the theories of monopoly, trade restrictions (tariffs, quotas etc.), unions, cartels, are based on it as they seek to create ‘artificial scarcity’ at the expense of the majority. It should be clear by now that this belief in scarcity was and is very much the architect of human behaviour in modern societies. There are many positives from this belief as it ensures or at least motivates society to maximise efficient use of its resources by being more productive, and one way to do that which is currently practiced in all nations is through ‘specialization’, Adam Smith’s greatest contribution to the world which spurred The Industrial Revolution in Great Britain during the period 1760 - 1850. However, a line must be drawn between the pursuit of efficiency and pursuit of wealth for (in the short run) there is a limit in the former while in the latter no such limit exists. In other words, competition is healthy, only to a certain extent.

Having demonstrated the ubiquitous presence of the concept of scarcity in everyday life, I turn now to the focus of my post here, scarcity and its impact on foreign policy and international affairs. Before understanding the ‘hows’ and ‘whys’ of the subject concerned, it is essential that we understand one of the most notorious implications of scarcity, population control. Practiced both formally in Communism (China’s one child policy), and informally in Capitalism (read on to find out how) there has been a surge in belief among economists in the field of economic development that rapid population growth has adverse effects on economic growth. They have provided empirical data to further cement their stand and have proven that in most developing economies, the active labour force has to support proportionately twice as many children as it does in richer countries. This results in a lower per capita income for each family in the developing countries. When per capita income growth is higher than population growth, an economy progresses, but when the population growth is higher, there is economic stagnation and even decline.

This Malthusian framework predicts that an increase in the world’s population will only increase the number of people living in poverty and that poorer nations will never be able to rise above their subsistence levels of per capita income unless they initiate preventive checks on their population growth. To make matters worse, a summary from the data gathered from the world bank in 2004 shows that high population growth leads to deeper poverty, and deeper poverty contributes to high fertility rates, thus deepening the problem of ‘poverty trap’. To illustrate, poor families that try to get themselves out or above the poverty line need to produce more, and this creates more demand for labour to work on their farm or any other agricultural activities, given their low budget constraint the cheapest form of labour is family, where the pay of wage is unnecessary. The farmer and his wife then decides to procreate with the belief that in a few years’ time they will have extra hands to help them out and earn more money. This becomes a problem when multiplying this behaviour to the general population of a country, it will only mean unskilled labourers (predominantly the majority in least developed countries) have less land to work on and diminishing marginal returns set in, deepening their economic woes.

Due to the steadfast belief in the concept of scarcity, nations’ elites are no longer trying to make the pie bigger for everyone; they are making the slice of the pie bigger for themselves at the expense of everybody else. How do they achieve this? The easiest way is to reduce the number of people sharing the pie. This can be done directly via birth control that has been successfully implemented in China and Indonesia, or through the ‘creation’ of wars. Under capitalism, wars can be seen as hitting two birds with one stone and acts as a perfect way to kick start a stagnating economy but with long term dire consequences. In destruction, there is opportunity to turn millionaires into billionaires- military gets huge budget of tax payers’ money, contracted companies make large profits on weapons, uniforms etc. and also the reconstruction of the devastated countries after the war green-lighted by institutions such as the World Bank, IMF, (it doesn’t take an economist to know which nation funds these institutions the most) or directly as a ‘foreign aid’ which will ensure that the neo-colonial interests remain in the colonised countries for a long enough time to extract the wealth of those countries just like the ‘Marshall Plan’ given by America to the ravaged countries after World War 2. The other major benefit of wars is the culling of the male population (de-population) so that, just as explained previously, the rich can get richer by making the slice of the pie bigger for themselves.

Before understanding the economic logic of wars, in order for a nation to continue growing it must produce and reach more consumers than it had in previous years. More production theoretically means higher demand for labour and lower unemployment which results in more money in the hands of the people, more demand for other goods and services, and so on. The legal way for a nation to continue growing when it has exhausted its domestic base of consumers is to call for freer trade by using the World Trade Organization (WTO) so that domestic producers can gain access into other nations’ markets and continue to grow. This process however, can take a very long time to reach a consensus and to make the rules binding on all its members as the events of the Doha Round where developing countries stood together against the developed countries a few years back illustrated. So the easier, faster way to achieve sustainable economic prosperity is what I like to term the ‘Bush Model’.

Here is how it works; the President of a superpower is pressured by special interest groups that help funded his campaign and ensured him votes, to feed them with more opportunities to make larger profits by redistributing the wealth from the poor to the rich without getting the taxpayers upset. The majority of voters on the other hand can and will make the pressure worse if there is soaring unemployment from a recession, one which without them knowing was caused by a previous war that inflated the economy. These two taken together provide the perfect recipe of war whereby the President can retain his position for the next election by creating an illusion, one where everybody sees the money flowing in but which isn’t really there that will create a temporary boom before the bubble bursts. The President decides to find a reason to engage in a war (Afghanistan, Iraq, and now Libya), or to simply cause a self-inflicted injury (9/11 attacks) to instil fear and uncertainty into the masses so as to make congress approve unconstitutional reforms of invading the privacy of its own citizens and the right to use military force against foreign countries faster. Everybody becomes happy; the corporations cash in the big bucks, the masses have more employment opportunities, and the President increases his chances of staying in power.

But the happiness is short-lived if society does not use the excess money in a more productive way to pay off the debts caused by engaging in war, inflationary pressures will eventually start to kick in and a recession is inevitable to ‘deflate’ the economy. This happened in 2001 and 2003 when Bush promised voters tax cuts and eventually authorized it once in power, while at the same time guiding America into two major wars (reduction of revenues + increase in costs = loss/debt). Where did the funds come from? It had to be borrowed, printed by the Central Bank, or both. In 2005 the effects started to set in, and The Fed had to fight the inflationary pressures off as a result of Bush’s wealth of knowledge in economics by increasing the interest rates which resulted in a subprime crisis and ultimately the collapse of the financial system. Globalisation (also a result of the concept of scarcity) proved to be a double edged sword. The mistakes of one nation travelled across the globe like a massive Tsunami would if a meteor hit the earth.

All of the previously mentioned is a picture of what modern societies look like, how they behave with one another, and what is fuelling those behaviours. If the reader understands the concept of scarcity, she will understand most of what she sees around her, as illustrated and focused on in this post, how scarcity impacts foreign policy and international affairs. Today we witness the President Obama taking office during economic instability, seizing the opportunity to ‘be a part’ of a revolution. Surprise, surprise, a ‘normal distribution’ is emerging and not some touted ideal of equality for all.

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