In my last post I mentioned Kondratiev cycles, long development waves linked to new innovations. I wondered whether we had come to the end of such a cycle.
Recently I was trying to explain to a colleague why I was so concerned about rigidity in our current systems, including the growing burden of compliance. I put it to him this way.
The growing proportion of resources tied up in monitoring, measuring and controlling reduces resources available for real investment. It also increases fixed costs. This reduces growth, while increasing economic vulnerability.
As an example, consider a firm with annual revenues of 100, fixed costs of 70 and a profit of 10. Assume that recession hits, leading to a drop in sales of 20%. Revenue is now 80, fixed costs are still 70, variable costs fall from 20 to 16. The previous $10 profit has been replaced by a $6 loss.
The Australian economy, indeed all western economies, is a bit like this firm.
Debt levels are high. That debt has to be serviced. As interest rates rise and the economy slows, the burden of debt increases. We respond by trying to save more, thus reducing demand.
The global asset bubble, the rise in price of assets such as shares and houses, has provided a buffer. We can spend because the overall value of our assets has been rising. The rise in asset prices stops or, worse, turns into decline. Again, we respond by reducing spending.
Economic growth slows and turns to recession.
Economic adjustment in these conditions can be slow and painful. This becomes worse if we are in fact at the end of a Kondratiev cycle.
The rise in global productivity has in part been underpinned by new computing and communications technology, while the technology has also opened new investment opportunities. All the easy fruit from the new technology has now been picked. Worse, we are left with the centralised organisational command and control structures and their associated rigidities and costs whose rise has been facilitated by the new technology.