The Absurdity Of The General Glut

Before you read Michael Pettis’ pessimistic take on the 7-8 year outlook for the world economy, I’d suggest you skip ahead to the end where he writes that the world’s deficit countries (like the USA) “have all the best cards” because we “control demand, which is the world’s scarcest and most valuable commodity.”

Ponder that for a bit. Take a deep breath. Ponder it again. Try to understand it, and you’ll understand that any pessimistic assessment of the medium-term outlook that ends in that conclusion is perforce a prediction that world leaders will screw up monumentally. I’m not saying it’s an erroneous prediction. I just want everyone to understand the difference between a forecast that we’re due for an objectively bad situation (a series of harsh winters that undermine the productivity of our farms) and a forecast that we’re likely to blunder (unemployed people starve while fertile land goes untilled) for no good reason. A world in which demand is the world’s scarcest and most valuable commodity is a world of blunderers. The world has not, after all, eliminated the problem of scarcity. The tragedy of scarcity is that we can only make so much stuff, so many people have to be poor. The good news is that there’s much less scarcity in 2011 than there was in 2006 or 1996 or 1976 or 1936. We are, as a world, much richer than we used to be. But we’ve hardly eliminated poverty or deprivation. So why should we live in a world where demand is the world’s scarcest and most valuable economy? The answer is we shouldn’t live in one.

The idea that you could have an over-capacity of production and thus a “general glut” of too many goods and services seems so bizarre that at first economists denied that it was even possible for such a thing to happen. Alternatively, Karl Marx took the view that such a glut was inevitable and revealed fundamental flaws in the idea of a market economy. But traditionally policymakers have not wanted to get strung up from lampposts, so they’ve used policy tools to prevent a glut from emerging.