Think of the economy as an ecosystem, not a machine

Posted on in Debates

NationalPost.com – Full Comment
January 6, 2016.   Andrew Coyne

A week into the new year, I think we can all agree this is pretty much the worst economy ever. Bad enough the stock market is down almost 600 points since Christmas. But the dollar, at 71 cents US, is the lowest it’s been in 12 years, with (as Global News reports) “more pain to come.” As for oil prices — they, too, are at their lowest level in more than a decade, at less than $34 a barrel.

And don’t think that’s just a problem for Alberta. As a Maclean’s magazine piece notes, “the rest of the country isn’t immune from those ominous grinding sounds coming from Canada’s longtime economic engine.” Why, wasn’t manufacturing activity, as measured by the RBC Canadian Manufacturing Purchasing Managers’ Index, recently reported to be at a “record” low — a record since 2010, when the bank started compiling this particular data series, but still.

And don’t even get me started on that whole housing market disaster, with Toronto home prices reported to have risen another 10 per cent last year. This kind of growth, after all, cannot go on forever, and then where will we be, what with Canadian households bearing all that debt — now 164 per cent of income, as you will no doubt have read elsewhere.

Still, things could be worse. Instead of sinking to new lows, with all that that means in terms of higher prices for consumers, the dollar could be rising, as it was for most of the past decade — and devastating our exporters. Or oil prices: If there’s one thing that’s worse for the economy than low oil prices, let me tell you, it’s high oil prices. Remember Dutch disease? Remember how it was supposed to be sucking the life out of Ontario manufacturers?

And as for those rising housing prices, just pray that they don’t start to fall. Or suppose all those over-indebted consumers stopped borrowing, and started (ugh) rebuilding their savings. It’s too horrible to contemplate.

Of course, the economy is not actually caught in the kind of whipsaw the foregoing suggests. The problem is less with the facts than those recording them: a phenomenon summarized by the American writer Gregg Easterbrook as All Economic News Is Bad. That the media are generally fixated on bad news is well known, but it takes on a peculiar inevitability in coverage of the economy.

Whenever something changes in the economy — i.e. there is news — it will be to someone’s benefit, and someone’s cost. But the winners have little incentive to advertise their good fortune while the losers are only a phone call away. So rather than report the reality that any given change will help some and harm others, we tend to focus only on the latter half of the equation.

Take the fall in stock prices. While these are universally presented as unambiguously bad news, for anyone young enough to be a net buyer of stocks — which would describe most investors — that’s actually good news. As long as you won’t be needing the money for a few years, you can be reasonably certain stocks will have more than rebounded by then. If, on the other hand, you’re old enough to be worried about the value of your stocks, you’re too old to own them.

But this sort of thing is rooted in something more than mere myopia. It reflects a particular view of the economy. You can see it especially when people do as I did at the top, combining a number of disparate events into an overarching narrative of calamity. For this assumes not only that the effect of each is unambiguously malign, but that they compound upon each other. When in reality as often as not they are offsetting: not by some lucky chance, but necessarily, the one as a consequence of the other.

It’s not coincidental that the dollar is falling at the same time oil prices are. It is falling because they are. And because the dollar is falling, the impact of the fall in oil prices is less severe: not only do central Canadian manufacturers benefit, in the form of their ability to price their exports competitively (and yes, we are starting to see that reflected in the statistics), but so does the oil sector, since oil is priced in U.S. dollars.

You see the same in reverse: growth in one economic measure, like GDP, will trigger offsetting changes in another, like interest rates — the familiar self-equilibrating mechanisms of a market economy. That’s not some sort of magic, in which one can believe or not believe. It’s simply a function of scarcity: In the universal competition for scarce resources, more of one thing must, inescapably, mean less of another.

I think the reason so many people get this basic principle wrong has less to do with their knowledge or otherwise of economics and more with their choice of metaphors. People tend to think in metaphors, and the wrong metaphor can lead to a whole series of errors. For example, the economy is commonly described as if it were some sort of a machine, like a car — hence the “engine” reference above — which is said to be “firing on all cylinders” or “running out of gas” and so on.

But a machine typically has one purpose to which all of its parts are fitted. An economy, by contrast, at least in a free society, is not meant to do just one thing, to achieve one ambition, but to co-ordinate everybody’s ambitions, disparate or even opposed as they may be. It is a network of interdependence, in which each person’s use of scarce resources must somehow be accommodated to every other’s.

As such it is best thought of not as a machine, but as a kind of ecosystem, with the same fragility and the same resilience. Leave its self-equilibrating processes to work, and watch it flourish. Start monkeying about at one end, on the other hand, and be prepared for all sorts of unintended effects to spread throughout.

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One Response to “Think of the economy as an ecosystem, not a machine”

  1. Very well reasoned article on the economy.

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