Economic theory tries to deal with a limited number of factors and the mechanisms by which they interact. The main factors are population, food, energy, property and manufactures, all of which are physical realities capable of being counted. They are the beans which bean counters count with. There are four mechanisms of exchange, money, barter, markets and allocation. These are the mechanisms by which the beans are exchanged.
Different economists have put emphasis on different factors. David Ricardo, the classical economist of the nineteenth century, was a banker who gave special attention to money; Thomas Malthus, another founder of nineteenth century theoretical economics, paid particular attention to population. Indeed he is the founder of population studies. Karl Marx, the founder of socialist theory, paid attention to manufactures, and to population, seen particularly as labour. The leading twentieth century economists, such as Maynard Keynes, Irving Fisher and Milton Friedman, have been derivatives of the Ricardian or monetarist school, though Keynes was a rebel against classical Ricardian orthodoxy.
Unfortunately, it is impossible to think of all these factors simultaneously. Perhaps there will be a time in the future when some super-computer will be able to calculate the interreaction of the global economy holistically. We are still far away from that day. At present, the limitation of the human intelligence means that we can only concentrate effectively on one of these factors at a time. The selection of any one of these factors or interreactions for study draws attention away from other, equally important factors. One can be both a Ricardian or a Malthusian, but one cannot concentrate on both aspects of economic analysis simultaneously without a loss of focus.
However, one can simplify economics by using the different physical factors as a checklist to detect signs of difficulty. That does make economics the gloomy science. At present, the world is suffering from a crisis of overpopulation, with the human population stretching the food supply beyond its limits. Population is continuing to grow, although there is already an inadequate food supply for six billion people and growing famine in Africa. It is possible that the twenty first century will replace the nineteenth as the century of famine.
Food is very closely linked to energy. Food production is dependent on the oil industry, in cultivation, in transport and in protection against pests. The food price has followed the oil price, to the point at which millions of people cannot afford a minimum food supply. That is already a catastrophe, and the trends are unfavourable. There is also a significant shortage of water.
Markets have flagged up food and energy as danger areas for the world economy, by raising their prices. Property and manufactures are secondary to food and energy, in that their prices can change without immediately affecting the price of food and energy. In fact, there has been a worldwide fall in housing prices, particularly notable in Britain and the United States, at a time of steep increases in the food and oil prices. The price of manufactures has been held down by the growth of low cost Asian manufactures.
There is much discussion of the scale of the global economic crisis. Some people expect it to cause a crisis comparable to the Great Slump a wiping out of capital values, a liquidation of global debt. We cannot yet be sure, but we can see that the main factors of global economic development are all in difficulty. On the one hand there is oil at $130 a barrel – on the other, there are banks writing off billions of dollars of assets.
I do not see any basis for economic analysis which would not throw up really alarming signals. These adjustments of the fundamental factors in any analysis put huge pressures on every Government. In the 1930s most Governments were destroyed by the slump. In Britain, Labour lost office in 1931; in Germany Hitler came to power in 1933, as did Franklin Roosevelt. I fear that process will be repeated, even if only by democratic defeats. The storm of the world is still rising.
Lord William Rees-Mogg
for Markets and Money