The state of the world today is clear proof that mainstream economists simply do not understand our global economy. If us engineers built bridges, reactors and planes that distorted, blew up and crashed as often as the economy built by our economists, we would surely all have been fired by now. So, let’s take a few minutes to discuss economics from the point of view of an engineer.
We all long back to the boom days when the economy seemed healthy and we all felt very rich and prosperous. Unfortunately, those days are long gone and will not be returning any time soon if we keep on doing the same old thing over and over again, each time expecting a different result. However, if we simply apply some engineering optimization to the system, the good times can return within just a few years and actually become a permanent feature of our global civilization.
In order to accomplish this, we have to do one simple thing: accurately identify the fundamental root cause of our economic problems today and design the appropriate solution. So, what is this fundamental root cause? Well, in my opinion, it is the massive lack of financial resilience among consumers which, in turn, is caused by the thing I see as the fundamental root cause of all our global problems today: our debilitating culture of consumerism and entitlement.
This culture of consumerism and entitlement is discussed in many other locations on this blog, but here we will just focus on financial resilience. Any individual can increase his or her financial resilience in two ways: decreasing costs of living and increasing wealth. If individuals throughout the economy can be incentivised to do these two simple things, we will see economic stability as never before.
The reason for this is simple. If our wealth increases, we have a larger buffer with which to maintain our lifestyles through any economic circumstances and if our cost of living decreases, this buffer will last for a longer time. If everyone has a financial buffer that can sustain his/her lifestyle for a number of years, society will be impervious to economic downturns simply because our accumulated wealth will be able to easily sustain us until our situation changes for the better again.
In fact, an economic downturn (a recession) is primarily a self-fulfilling prophecy created by the perception of bad times ahead. This perception causes people to rein in their consumption, thereby destroying consumption-driven jobs, reducing disposable income and worsening the bad economic outlook even further. This is why mainstream economics is so obsessed with getting consumers to spend at all costs. However, if people had a few years of financial resilience, they simply would have no reason to engage in such sporadic saving sprees based on nothing but some stories on the local news channel and the economy would be able to churn along with unimaginable consistency and stability.
But there is another very good reason for building financial resilience in our modern world: rapid change. Few people will argue the fact that the pace of change in our modern world is truly astounding. Old occupations are replaced with new ones every day and the economy just gets more and more volatile every year. In order to prosper in this environment, everyone needs a substantial financial buffer to make it comfortably through the bad times so that they can truly prosper and build up their buffer even further during the good times.
Unfortunately, the majority of people live from paycheck to paycheck and are financially ruined and reduced to child-like dependence on government welfare by even the slightest setback. This total lack of financial resilience on the level of individuals lies at the root of our current economic problems. If, and only if, we can convince the majority of citizens to build up their financial buffers, can we enter into the era of perpetual prosperity.
This is at least how an engineer would approach the problem. An economist would encourage people to borrow and spend their financial buffer into oblivion (as shown on the graph below), leaving them incredibly vulnerable to the economic distortions that such spending sprees inevitably bring. This fundamentally flawed economist strategy has failed (obviously) and the time has come to apply some tried and tested engineering logic to the problem.
Engineers understand the importance of fundamentals when dealing with complex, non-linear systems. They understand that superficial, reactive solutions (quantitative easing, bailouts, zero interest rates etc.) will only worsen the situation in the long run. And yes, as discussed on the next page, our global economy is the very definition of a complex, non-linear system. We really need to get the fundamentals right or this thing will blow up in our faces with deadly force.