Jun

18

So, what of employment?

A more primary question would have been, what of the economy? Why are we still struggling? But then, a more primary question yet is, why did the economy tank in the first place?

We had a bubble, which consequently burst. Why should that cause the economy to contract? A bubble is a massive overpricing of an asset (housing, in this case). Overpricing means that many people (i.e., the economy as a whole) had a massive misallocation of resources. Resources were directed toward activities which were not, it turned out in the end, productive.

It seems widely accepted that the economy 'overheats' during bubble creations. In my opinion, the economy does not 'overheat;' there is just a wide-spread misconception of general wealth creation, while what is in the works is general resource misallocation, i.e. wealth destruction.

E.g., you have invested your capital into a widget factory, because your neighbor wants to be buying widgets, on credit. You make 1,000 widgets at $1K a piece; he buys them from you. You make 10,000; he buys them. Are you a multimillionaire? You may think that you are, until he defaults on his credit. And when he does, all you have 'produced' were 10,000 useless widgets. You have misallocated your resources.

We can modify this example slightly by replacing your neighbor's credit with a printing press. Instead of defaulting on his credit, he just prints more and more fiat money, until you realize that your wealth has been denominated in Mozambique currency all along. All the same, you have misallocated your resources.

The latest bubble we have lived through had two massive prongs of misallocation: housing and (related) consumer staples. MacMansions were not the only things built; useless widget factories, warehouses, and retailers were the other. The economy was not 'thriving'; what was being created was not 'wealth'. Them were piles of widgets, purchased on credit and freshly-printed fiat money.

Anyway, the bubble burst and all, you may ask, why no [or sluggish] recovery now? Please see my next post: "Unemployment: (2) why slow recovery?"


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  1. david higgs on June 22, 2012 12:43 pm

    Over pricing of an asset (housing) true. What about the bubble of wages……..Its like a balloon where CEO are fat with and the string below are the little people …holding onto a string…..Mr Kotlov?

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