Imagine the face of Lt. George Morris. On March 8, 1862, his ship, the USS Cumberland, found itself a victim of what the economist Joseph Schumpeter called ‘creative destruction.’ The creativity came in the form of a revolutionary new technology, iron-clad ships. The destruction came in the form of cannonballs, which were smashing the poor Cumberland to bits. The Cumberland fired its cannons too. But its volleys merely ricocheted off its adversary, the CSS Virginia, like pebbles off a turtle’s back.
Our subject today is not naval warfare. Nor is it history or metallurgy. Instead, it is a worry fit only for an economist. No sensible man would waste a minute on it. It is the problem of ‘too much.’
The normal ups and downs of a healthy economy frighten capitalists terribly. As soon as their businesses get into trouble they howl for subsidies. When their investments go down, they whine for bailouts and central planning. It is not brains they lack; it is courage. They are not dumb, in other words; they are wimps.
But their philosophers and policymakers are the most pusillanimous of all. Their desperate reaction to the mini-recession of ’01 led to the bubble of ’05-’07. In a panic, they turned the fiscal balance of the US government upside down, from surplus to deficit; the country added $2 trillion to its national debt in the following 48 months. Meanwhile, interest rates dropped below the rate of consumer price inflation – where they’ve been ever since. Then, when their bubble popped in ’07- ’09, they showed no interest in discovering what was really going on or why. Instead, blinded by fear, they rushed in like a waiter dousing the flames on a bananas foster.
And now we sit in front of a soggy mess. Having learned nothing, our leading economists are all for action. In his advice to the Fed, for example, Paul Krugman urges a variety of experiments. “Nobody knows how well any one of these actions would work,” he admits. But the Fed should be “doing all it can…” Why? His English counterpart, Martin Wolf, answers. Because “…advanced countries remain highly short of demand…a threat to the survival of the Eurozone and even the open world economy.”
This terror du jour is the most remarkable yet. Wolf and Krugman believe there is an imbalance between the supply and demand. No kidding. They fear capitalism is not up to its most basic and simplest challenge.
Krugman: “The fact remains that our current problem is, in effect, a problem of excess worldwide savings, looking for someplace to go.” With five people looking for every US job, there is also presumably an excess of labor. Even the normally level-headed Nouriel Roubini says we have a “world of excess supply.”
Can you believe it? Their knees give way, fretting that markets no longer match up buyers and sellers. They might as well worry that maggots won’t find dead meat. Karl Marx warned about the same thing. Driven by the profit motive, entrepreneurs will always overdo it, he said. Then comes a correction, as overcapacity is eliminated. The correction will cause people to lose jobs, he continued. The unemployed workers will have to stop shopping, causing a depression. Oh ye of little faith! There’s always a buyer for every seller – at some price. For thousands of years, supplies have always come together with demand.
What is the cure for ‘excess’ capacity? Falling prices. Everybody who is not a swindler or a fool knows it. The real problem, from the activists’ point of view, is not excess or shortage. It is fear. They are afraid of the prices it will take to clear the market. Shares may have to lose half their value. Property could be knocked down by another 20%. Banks and nations may go broke.
Falling prices are painful. But it could be worse. Capacity could be reduced in another way. Iron ships were pioneered by the French in 1859. Their first effort was named La Gloire. The British quickly made their own ship, Warrior, a year later. But it was in America, at the mouth of the Chesapeake Bay, that the world first saw what iron hulls and steam engines had wrought. The iron-clad CSS Virginia shot up the USS Cumberland, and the USS Congress. It retired for the night, having destroyed an entire industry too – timber-based shipbuilding. The next day, the confederate ship came back to finish off the USS Minnesota, which had run aground the previous day. In its path was an even newer and more modern ship, the USS Monitor, with only two big guns and a revolving turret. The two of them blasted away at each other for three hours. Neither could land a decisive blow.
In 48 hours, shipbuilding capacity was destroyed twice. Until then, there were shipyards all over the world that could turn out state-of the art vessels. But on March 10, 1862, there was hardly a single one. First, the heavy iron-clad Virginia had made wooden warships obsolete. And then, the technologically more advanced Monitor brought forth a whole new era. It was not enough to cover a ship in iron. The ship had to be radically redesigned and constructed using new skills and new materials. Suddenly, the iron mongers were working night and day…and the great oaks could relax.
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