There this argument in economics that big, interconnected markets are more stable than markets without inter-dependencies because can make it through economic shocks better when they can dissipate the impact of those shocks more widely. This makes sense on a macroeconomic level where you don’t actually look at the individuals and where the low level details are below the line of sight.
There is also a line of thinking about smaller or developing economies that don’t have hyper-specialized labor forces, especially when those generalist labor forces are more self-sufficient, in the sense that they are spending their time and energy on things that they don’t bring to market, that says these individuals are more resilient to economic shocks than the individuals in a more developed economy. Nicholas Nassim Taleb might call them anti-fragile.
When you take both of these points of view together, it seems like there is an optimal upper bound on the size an economy can be before it becomes fragile.
In practice, we can look back historically and sort shocks from crisis from catastrophes, which seems wise as their scope and causes are different. We’ll see that major events like the 2000, 2008, and 2020 financial crises were, in a macroeconomic sense, not that big of a deal – capitalists by and large came through as well or better off than they were before, the global financial system itself was not negatively impacted even though large commercial institutions failed and Greece nearly defaulted. The inter-dependencies, helped by strong, sometimes unprecedented state action did spread the load as intended.
It’s easy to look at the 1929 crash and the Great Depression as a catastrophe. The inter-dependencies of the global economy were not strong enough to spread the load and the global economy collapsed.
Both are well traveled ground.
Today we find ourselves not in a crisis, per se, rather we are suffering from a supply-side shock to the global economy as central banks relax the dramatic actions taken in response to 2008 and extended because of Covid-19 that made borrowing money nearly free of cost. An entire generation of financial professionals have never seen a world where money costs money and they are panicking in slow motion. It isn’t a crisis because the global financial system is not at risk of collapse, but it is a shock because the global economy is not able to absorb the impact of the shock and the inter-dependencies that were supposed to spread the load are now the source of the shock as multinational corporations contract their operational spending in a vain search for efficiencies in businesses that could not have been built in a world where money isn’t free. The global economy is fragile; a shock stresses the system in a way the system does not know how to respond to and can’t adapt to a new reality.
The reaction by the market to cut labor costs while maintaining stock buy-back programs and continuing to lobby against taxes and regulations that would have made states and the markets they support more resilient to the shock is one sign of that fragility. Inept fiscal policy forcing the monetary policy changes that are driving this shock are another; central banks that are raising interest rates in response to inflation are only doing so because governments refuse to enact fiscal policy that would have the same effect, such as raising taxes on the wealthy and corporations. Inflation is the sum of the the amount of money created and the amount of money removed. Money is created when governments spend or central banks loan it out, but you only remove money by taxing it out of existence. If you spend or loan out more money than you tax, then the sum of money grows without bound, like a cancer, and the system becomes unstable. You can’t credibly talk about reducing government spending or increasing the cost of borrowing without also talking about increasing taxes because that isn’t how the system works.
All of that is macroeconomic, a problem set at the scale of the global market. When we look at the effect, principally rising prices and lower employment, the global markets start to look like Antarctic glaciers being eaten away from below by warm water. No matter which why you look at it, having fewer customers is bad for any business, and if the solution to a problem created by income inequality is to make more people poor and poor people poorer, then the problem is not going to be solved because the beneficiaries of income inequality aren’t buying the goods that most companies produce.
Perhaps the best thing to happen as a result of using labor costs as an operational cost efficiency valve, will be that organized labor experiences a resurgence, not because of the collective bargaining power it gives to workers with capital, but because of the collective bargaining power it gives to workers with the State – the only entity that can create money and the only entity that can tax – to force a fix to the inept fiscal policy that is driving this shock, although, 12 years after Occupy Wall Street managed to accomplish nothing, it is hard not think that it is more likely that the State will continue to be captured by capital and the cycle will continue.
In light of that, individuals should be looking to become more self-sufficient, taking pains to diversify their income streams, to reduce their dependence on the market, and to become more resilient to the shocks that are coming. The hundreds of thousands of tech workers laid off in the last year should be looking to start their own businesses, not because they are going to be successful, but because they are going to learn how to be self-sufficient and resilient. And when they do start their own business, they should shun VC capital. VC money has never been free to the creator, in fact the VC model is to stand between creators and free money and use that middleman position to capture creators and their output for their own gain. Creators have never needed VC money to create, but it is getting easier and easier to share and sell those creations without it.
Somewhere out there is an optimal size for the global economy, and we are well past it. If you believe in the Invisible Hand, a contraction and a reset is coming. If you believe in the State, then you should be looking to it to fix the problem by freeing the State from the entanglement of capital. If you believe in the power of the individual, then you should be looking to become more self-sufficient and resilient and building and strengthening community with your neighbors.
The global economy is fragile, community and self-sufficiency is anti-fragile.