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Growth beyond the limit

The economic development of the past two centuries has changed our world quite a bit. If our ancestors had a chance to take a look into the future, they would hardly be able to recognize the world. The very first thing they would notice is our ability to produce economic goods beyond our needs, which was unthinkable back in the days due to limited technical capabilities. Consumption-based production has transformed into production-based consumption. Humanity no longer seeks ways to improve production to satisfy needs. Instead, we are now looking for more sophisticated ways to consume the glut we produce.

Michel-François Clerin
Michel-François Clerin
This definitively has some positive sides to it and is in fact commonly viewed by many as a panacea to solving the world’s most critical economic problems : unemployment , budget deficits, etc. Economic prosperity and a wider range of available goods and services make our lives easier and more fulfilling, but there is something that doesn’t quite go hand in hand with the economic reality. Increased consumption is principally seen in the developed world while other countries (more than 2 billion people) are still lagging far behind. In fact socio-economic inequality has been growing more and more rampant even in the developed world. In other words only certain parts of the world can appreciate the benefits of constantly improving production capabilities.

There is another problem often overlooked by modern economics- now that we found ways to improve production by introducing new sophisticated technologies , we have long come to a realization that consumption must be stimulated in a similarly sophisticated manner. It now turns out that developing production capabilities is not enough. In fact, globalization often makes it unnecessary if production can be moved to other countries. A consumption potential of an economy is now becoming an important factor, so vital that it is considered almost another production factor, even though it is not officially recognized as such. Previously there was no need for such recognition since consumption limitations of the past were successfully addressed by means of economic expansions. But within the framework of globalization finding new external markets is becoming more difficult and costly. An ability to boost consumption is becoming vital for stable economic development.

Globalization is redistributing both production and consumption globally causing some countries ( e.g. China and India ) to “ specialize” in production and other countries in consumption ( principally the developed world ). Problems with consumption in the developed world will immediately affect production in the developing world. Thus boosting a developed –country consumer’s spending becomes a global project involving the entire world economy.

Having considered all the above, is a constantly expanding GDP that much of a perfect solution to economic problems? It appears to be the opposite if it exceeds the natural level of consumption on a respective market. For quite some time , consumption was able to be lifted to higher levels by means of credit, which entailed a creation of an entire mechanism of global credit expansion . But credit also expended production thus making a crisis like the current one an inevitable thing. It is in fact an over-production crisis but on a global scale. But any long-term expansion of credit soon becomes unsustainable when ultimate consumers will not be able to borrow any more , their servicing of previous debt becomes more and more challenging. That is when they start defaulting on their loans. When debt has saturated an entire economy and eroded many households ‘income the financial system collapses, any disbalance in any tiny segment of that system being able to send the entire economy spiraling down. The present crisis is not a financial one but a global economic one.

Michel-François Clerin
524 Av. Louise
B-1050 Brussels - Belgium

Mardi 9 Mars 2010

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