Choosing Recession
A recession is coming, says Governor of the Bank of England Mervyn King, and there will be pressure on sterling. We have been, say commentators, living beyond our means. This does not altogether add up. Are we about to be subjected to an economic storm, blown in from the Atlantic like a weather system?
Recession is a loosely used term which suggests a decline in the total size of the economy. Leaving aside important questions about the significance and reliability of the statistics, and whether perpetual growth is desirable or practicable, there is, presumably, some kind of build-up of unsold goods which leads to reduced orders and hence a lack of demand for those goods. But that should not in itself lead to a decline in demand within the economy as a whole. Producers may need to adapt to changing demand but that should not lead to reduced overall demand. On the contrary, the process of adaptation should create a demand for labour and new physical capital.
In the run-up to the present troubles, some people were paying too much for land, which is now worth less than they paid. But other people have received these payments, so the purchasing power has merely been transferred, and again this cannot be a cause of recession.
What of goods that have been imported and paid for out of borrowed money – 42 inch plasma television sets, perhaps? The producers have received payments, in sterling, and there are people and companies in, say, China, who are holding sterling balances which can only be spent in Britain or on British goods or services. Again, this should not cause recession. On the contrary, when large amounts of sterling are held by foreigners, the exchange rate should drop, making Britain an attractive place to visit or purchase from.
What about the so called credit crunch? Shortage of credit will make it difficult to borrow to purchase physical capital, but interest rate cuts should have helped to ease the situation. In any case, expectations of recession will themselves discourage investment, helping to entrench the state of recession. This is obviously a factor, but the economy does not run only on confidence. The explanations just don’t stand up. It sounds as if recession is a policy of choice rather than one that has blown in on the south-westerlies.
Looked at from another point of view, a possible explanation emerges. Demand comes from supply. If one has nothing to supply, one cannot demand. Is recession caused by a supply-side blockage? There are two primary factors of production: wealth is created by the action of human labour on land – the surface of the earth and its products. Even in the most advanced technical economies there is no escaping from this fundamental relationship. Capital, properly defined, is simply wealth used to create more wealth, plus goods in course of production: the carpenter’s tools, the fisherman’s boat and nets, the shopkeeper’s stock, etc. There is an ample supply of labour, although of course the relation between the tax and benefits system puts up the price of labour and makes employers reluctant to employ. And despite the credit crunch, there is no shortage of capital – think of all those foreigners with their wallets stuffed with sterling. What about the other factor of production, land? Already, people are demolishing factories and leaving sites vacant. The one in the picture, slap in the middle of Brighton, has been empty for 20 years, despite full planning consent for office development. When land is being held vacant, the effect is to throttle the economy. Labour and capital is locked out of those sites, cannot produce and hence can not demand.
Recession is primarily, I would suggest, the result of a supply-side blockage caused by malfunctioning of the land market. Since the cure to that is well-known and explained elsewhere on this web site, one must conclude that recession is a voluntary policy. Or is there something I have missed?