The Very Slow Economic Recovery

The Recession, which began with the economic crash of 2008, is officially over. But the recovery is going extremely slowly, unemployment in the U.S. is close to ten percent and Europe is mired in it's debt crisis.

Part of the trouble is certainly factors that I have explained in previous postings. We need a continuous flow of new ideas for products in order for new industries to replace those which have permanently shed jobs. If we do not produce enough of these new ideas, we will fall behind on what I have termed "The Idea Curve" and will remain afflicted by unemployment.

As for the wealth structure, as I explained in detail on the economics blog, if too much wealth is taken by those few that are the richest then there will not be enough money left in circulation to buy all of the goods and services that are being produced. Since it does not make sense to produce goods and services that are not going to sell, industries will cut back on production and let workers go, which means that the average worker has even less money to spend, thus furthering the recessionary spiral.

Over the past few decades, the number of millionaires has dramatically increased and many that were once mere millionaires are now billionaires. The trouble is that this shift of wealth has left everything else nearly broke.

But yet, there is a still deeper reason behind the slowness of the recovery that goes beyond the left or right of the economic system itself.

On this economics blog there is a posting titled "The Three Fundamental Costs". We know that, in a free market economy, prices are determined by the Law of Supply and Demand. But if we take this further, we find that there are three fundamental costs which determine what the price of anything will be.

The Three Fundamental Costs are: The cost of land, the cost of communications and, the cost of transportation.

The most fundamental of the three is the cost of land. The buildings where goods are produced and sold and where economic transactions take place must be built upon land. The result is that the cost of land finds it's way into everything that is sold.

The simplest illustration of this is the way everything costs more in cities. There is more demand for land, this raises it's cost according to supply and demand, and the cost finds it's way into everything else.

The cost of land is the most fundamental of the Three Fundamental Costs. But it is also the one over which we have the least control. There is only a fixed amount of land. We could spread cities out so that there would effectively be more land, but that would only raise the cost of transportation.

The factor that we should consider, with regard to the slowness of the economic recovery is actually an index of the other two fundamental costs: The cost of communication multiplied by the cost of transportation. This is really what governs, at a fundamental level, the state of the economy. That is why I have called this "The Three Fundamental Costs". This does not mean that we need to do a literal calculation of this index.

There is a posting on the progress blog, http://www.markmeekprogress.blogspot.com/ , about our technical progress in recent times in communications, as opposed to the parallel progress in transportation. The posting is titled "Parallel Revolutions" and it describes how fantastic progress has been made in the field of communications while transportation has lagged far behind. While that posting is about technology, it is relevant to our discussion of economics here because technical progress lowers the costs.

Back in the Nineteenth Century, transportation and communications revolved around the railroad and the telegraph and the costs of both were high. The great post-war economic boom in the western countries rode especially on the low cost of transportation that resulted from the mass-production of vehicles and trucks, combined with cheap fuel and the construction of an extensive system of highways and main roads. Television drastically lowered the cost of one-way communication for advertising, but point-to-point communication by telephone to set up business deals was still expensive.

Those were the days when, in terms of economics, much more progress was made in the field of transportation than in that of communications. Fuel was cheap, but phone calls were expensive and there was no internet. The global business network that we have today was built upon these low transportation costs.

But progress in communications caught up to that in transportation. The general increase in productivity since the end of the recession in the early 1980s rode upon the continuous drop in the cost of communications, just as the earlier postwar boom did on the drop in the cost of transportation. The development of the internet, high-capacity satellite communications and fibre optics, and the mass-marketing of personal computers and mobile phones has made global communication and information searching so cheap that it is nearly free.

These two, of the Three Fundamental Costs, are what really drives the economy at it's most fundamental level. Notice that during the time of the nasty recession in the early 1980s, the cost of communication was still high and the price of fuel had really began to climb, compared to what it had been in the 1970s.

There was dramatic technical progress in communications, which brought a corresponding lowering of that fundamental cost, during the 1980s and into the following decade. The 1990s were a boom time because the internet, mobile phones and fibre optic technology had opened up a world of communication possibilities, while the cost dropped like a stone, and while the cost of fuel was still relatively low.

But the new millennium brought troubles. The cost of communication still continued to drop, but the cost of fuel went into an upward climb. Not long after just about everyone got online, the price of fuel underwent a really big increase.

Fuel had been increasing in price for quite some time, but this had earlier been outpaced by the drop in communication costs. This increase in fuel prices in the new millennium lowered the economic index that I explained, based on the Three Fundamental Costs. With all other factors being equal, economic activity is in inverse proportion to the cost of communication multiplied by the cost of transportation.

Put simply, there is nothing that we can possibly do to stimulate an economic recovery like lowering the cost of transportation. As I pointed out in "Parallel Revolutions", we need to repeat the progress that was made in communications in recent decades, in the field of transportation. This must necessarily mean doing away with fossil fuels, and running vehicles on other sources such as the energy from sunlight.

When the price of fuel increases, it makes everything else more expensive. Not only do you have to pay more to get to work and to the store, but when you get to the store things are more expensive because it cost more to transport them to the store. This takes a massive cut out of the consumer spending that is necessary to drive the economy, and this is what is hindering an economic recovery.

Just stop and think what it would be like if half of the money that is spent on fuel, across the economy, was spent on other goods. We would have a boom town and would be far wealthier than we are now.