Systemic Crisis as a "Short Circuit"

 

What is a systemic crisis from the point of view of an electric model? This crisis breaks the structure of the economic system or its portion. How does this happen? A new relationship between certain points in the circuit occurs. Electricians call this a "short circuit."

 

Let’s look at the Great Horse Manure Crisis. This crisis arose at the end of the 19th century. At that time, several cities began to grow very rapidly: Paris, London, New York, San Francisco. Cities grew very quickly, their population grew, and at the same time the demand for transportation grew. It was necessary to transport more and more people and goods. In New York, for example, one hundred thousand horses hit the streets every day. The only transportation for inner-city needs was the horse-driven one! There was the railway, but it was suitable only for intercity communication.

 

So, 100 thousand horses a day. So what? Nothing, except one little thing: every horse produces about 30 lbs of manure per day. When there are few horses, it doesn’t matter. You can clean up after them. But when there are 100 thousand of them, it turns into one and a half KILOTONS of manure per day. Terminology of the nuclear era? Oh well.

 

It is hardly possible to remove this manure from streets. There is no landfill to dump such quantities. Let’s keep in mind that it should be taken out on horses, too: there’s nothing else! One and a half kilotons of manure added on the streets every day mean flies, infections, stink and unsanitary conditions. By the mid-1930s, London should be covered with a 10 feet layer of rammed manure. The situation was becoming simply hopeless!

 

Where the "short circuit" occurred? It was a new connection between point A “transport” and point B “sanitary conditions.” 

 

Crisis of Overproduction or Crisis-caused Overproduction?

 

A short circuit, as always, is accompanied by a sharp increase in the current consumed by the circuit. The economy begins to consume additional resources and grind them for no good purpose. Imagine, for example, an army of manure cleaners on the streets of New York or London. Imagine constantly growing landfills for this manure. One and a half kilotons per day. Horror! And all these enormous resources, in fact, are wasted without any real benefit to society.

 

How often does this short circuit manifest itself? How dangerous is it?

 

One of the most visible phenomena accompanying the systemic crisis is the unprecedented “overproduction” of goods. These goods implement the principles of the old, departing paradigm. Karl Marx confused the cause of the crisis with its secondary features and called it a "crisis of overproduction", although it would be much more correct to speak of a "crisis-caused overproduction." It is as if the hair growth during puberty was considered a primary feature, and shaving all the hair on the body was used to prevent pregnancy. With the same effect as fighting the systemic crises by planned prevention of overproduction of goods...

 

The mechanism of overproduction is, in fact, as follows. The crisis begins when consumers who are subconsciously dissatisfied with insufficient improvement in the degree of satisfaction of their needs gradually stop buying the products that use the principles of the old paradigm.

 

Specialists and leaders of the industry that fell victim to the systemic crisis do not know any other paradigm than the existing one and believe in the infinite potential for improvement. As a result, they believe that the decline in sales in their industry is caused by some mistake that has not yet been identified. From the experience of past crises caused by management errors they expect that as soon as the error is revealed everything would return to the normal way and consumers would buy their goods again. After such a temporary decline in sales, there is usually increase in demand, and company needs to be prepared. Therefore, enterprises, despite the decline in sales, are increasing their production and accumulating products in warehouses in anticipation of upcoming surge in demand.

 

The same could be observed during the crisis caused by wrong decision. After the crisis, the stocks of goods quickly disappear. Therefore, no one talks about any “overproduction” here. However, the situation with the systemic crisis is somewhat different: consumers no longer are willing to pay their hard-earned money for goods that do not satisfy them, and will never want to.

 

Therefore, goods produced during the systemic crisis will remain in warehouses, and no one will ever buy them again. The loss of funds, resources and efforts invested in these products is enormous and irrecoverable. Both enterprises, their investors, their suppliers, and all the "supporting", "providing" and "related" industries suffer. The trouble expands like circles on water.

 

This is what we call "crisis-caused overproduction." It is not the “lack of plannedness”, as Karl Marx who understood nothing in business said, but rather the excess of plannedness and wrong assumptions laid down in the planning process.

 

There is, however, one exception to this rule: if a crisis caused by a catastrophe follows immediately a systemic crisis. Then, the level of expected satisfaction of needs in society decreases and consumers would agree to the use the "obsolete goods" temporarily, until the force majeure crisis passes. However, as soon as it ends, consumers again stop buying these goods. It means that war is only a temporary slowdown of the systemic crisis rather than a way out of it.

 

Crisis-caused overproduction and its consequences necessarily lead to a decrease in the value of money. Credits allocated for the production of goods that no one buys cannot be repaid by enterprises. As a result, the financial system begins to fail even before anybody becomes aware of overproduction. On this basis, the crisis is called financial, economic one, while it is essentially a systemic one. Contemporary crises are a set of systemic crises that simultaneously occur in multiple areas of human activity. These crises, in my opinion, mark the transition from the industrial era in the human history to the post-industrial, information age.

 

* * *

It is very difficult to detect a short circuit and localize it. This work is time-consuming. All this time the electricity is flowing "nowhere," heating and destroying the entire circuit. So it is in the economy, too: it is very difficult to detect a systemic crisis in a timely manner. While the industry leaders are trying to understand what is the cause of the crisis, the “wasted production” continues. The production of goods and services that nobody needs consumes resources that could bring much more benefit to humanity. Human labor is being spent while it could be used more efficiently. These losses are irreversible, and with every crisis, mankind is losing more and more. What could be done?

 

Economy in Crisis | Financial and Systemic Crises | Fuse

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