Economy Part 3 - Resource Availability
I just love personal throughput stories, especially when they involve other people, and aren’t we are all guilty of having such great ideas. You know those stories; the ones where you put in lots of money along with hours of time and come up with absolutely nothing but a funny story. Well, we were getting ready to plaster the outside of our house with clay and David suggested we needed a mortar mixer. My first question was, “Why not just use a cement mixer?” But David was insistent that only a mortar mixer would do. It is the outside drum in a cement mixer rotates mixing the cement whereas the outside drum in a mortar mixer is stationary and the paddles inside the drum rotate mixing the mortar, or in this case, the clay. A few days after our initial conversation, David showed up with a beat up old mortar mixer. “These mixers sell for $2000 and I got this for $75.” I look it over and say, “Let’s see how it runs.” David replies, “It doesn’t quite run yet but with a little work it will do the job.” We look it over and realize the engine that powers the mixer doesn’t run so I suggest we take it to Jacque and David agrees. Jacque, who is almost 80 years old, is one of those old time mechanics who never finished high school but knows so much about how to fix anything that needs fixing and over the years I have learned so much from this man. We call Jacque who tells us to bring the engine up the next morning, so that afternoon we take the engine out of the mixer. The next morning we get to Jacques about 10:00am and together the three of us start trying to get the engine running. David and I noticed that there was no indication of what make or model engine we had, absolutely nothing. Jacque took the points out, which are responsible for the spark needed for ignition, and told us it was the points were the problem. What is more unbelievable is he told us he thought he had those very points we needed. It’s true, Jacque has everything imaginable and he starts the hunt, going through cabinets and boxes of stuff until he says,” Here they are.” After Jacque installed the points the engine started, however it was running really poorly. The next step was installing a new spark plug but that did not solve our problem. Jacque now diagnosed the need for a valve job. David and I just looked at each other and Jacque says, “It’s really nothing, we’ll have it running in no time. Let’s each some lunch first.” After lunch we headed back to the garage where Jacque, along with our help, started moving all this junk finally uncovering an ancient valve surface cutting machine that hadn’t seen the light of day for probably 30 years. Soon we three were taking the engine apart and had the valves in our hands. Time seemed to stand still yet the hours passed by and it was now about 8:00pm. Jacque invited us to dinner saying we could finish the job after we ate. Once the engine was put back together and we started it up, it ran a lot better, but there was still something wrong. This time it was the carburetor but Dave and I decided to work on that at home. We finally left Jacque’s at 11:00pm with an hour and a half drive home. The next day we took a critical look over the rest of the mixer and realized the bearings for the shaft were shot and that was just an obvious thing that was wrong. So, let’s see now, David paid $75 for the mixer, I paid Jacque $75 for his time and the parts (where can two people spend a whole day with lunch and dinner included for $ 75 dollars – what a bargain), and now we see the mixer needs carburetor work and bearings. I didn’t see David for about a week and when he finally showed up with his trailer he looked at me and said, “Help me load up the mixer.” As we were loading it I asked where he was taking it. He replied, “To the scrapyard.”
Understanding the complexity of the big three issues; throughput, exponential growth, and the law of diminishing returns, all interacting with each other throughout our global culture and its relationship to our economic model is imperative for humanity moving forward in a productive and meaningful way. When I started looking at the interconnectedness of the big three I started wondering what effect they might have on the economy and ran across a great description of their interaction from the 1800’s.
David Ricardo, who had great respect for other economists such as Thomas Malthus and Adam Smith, painted a picture in words of how the big three would not only each affect the other, but influence the economy as well. In his “Essay on the Influence of a Low Price of Corn on the Profits of Stock” Ricardo describes how economic decisions influences the big three. I have picked out some excerpts, however, I suggest reading the whole article (If you google the title of the essay it will come up – the full title is extremely long). Ricardo’s first assumption is that a farmer must do more than to break even economically to make farming worthwhile. “Whenever, then, the usual and ordinary rate of the profits of agricultural stock, and all the outgoings belonging to the cultivation of land, are together equal to the value of the whole produce, there can be not rent.”….”In the first settling of a country rich in fertile land, and which may be had by anyone who chooses to take it, the whole produce, after deducting the outgoings belonging to cultivation, will be the profits of capital, and will belong to the owner of such capital, without any deduction whatever for rent.”
Ricardo explains that population increases near the food source and the farmer increases profits due to selling more food to an increasing population. “For period of some duration, the profits of agricultural stock might continue at the same rate, because land equally fertile, and equally well situated, might be abundant, and therefore, might be cultivated on the same advantageous terms, in proportion as the capital of the first, and subsequent settlers augmented>”… “Profits might even increase, because the population increasing, at a more rapid rate than capital, wages might fall.”
Ricardo goes on to describe ways in which profits increase and how profit over time can diminish with costs going up. “Profits might also increase, because improvements might take place in agriculture, or in the implements of husbandry, which would augment the produce with the same cost of production. If wages rose, or a worse system of agriculture were practiced, profits would again fall. These are circumstances which are more or less at all times in operation -- they may retard or accelerate the natural effects of the progress of wealth, by raising or lowering profits -- by increasing or diminishing the supply of food, with the employment of the same capital on the land.”
After some time the “Law of Diminishing Returns” of fertile land, along with exponential growth in population and the increasing of throughput of farming distant fields and the expenses that go along with the big three set in. “We will, however, suppose that no improvements take place in agriculture, and that capital and population advance in the proper proportion, so that the real wages of labour, continue uniformly the same; -- that we may know what peculiar effects are to be ascribed to the growth of capital, the increase of population, and the extension of cultivation, to the more remote, and less fertile land.” … “After all the fertile land in the immediate neighbourhood of the first settlers were cultivated, if capital and population increased, more food would be required, and it could only be procured from land not so advantageously situated. Supposing then the land to be equally fertile, the necessity of employing more labourers, horses, &c. to carry the produce from the place where it was grown, to the place where it was to be consumed, although no alteration were to take place in the wages of labour, would make it necessary that more capital should be permanently employed to obtain the same produce.”
Ricardo fills out his picture; the land the farmer once had for free begins to cost more and more. The population needs housing, services, roads, etc. and the demand for land drives the prices higher. At the same time the land, through diminishing returns, grows less and less because it becomes less fertile. In this situation prices for ones produce have to increase to make Ricardo’s first assumption true; that the farmer must do more than break even to keep farming. When the throughput increases past the ability for the population to support the local systems, the local population must start to move out of the area.
This simple description demonstrates the importance of basic resources. In this case we are looking at land itself and simple machinery. In today’s world we depend on so many resources to keep our system going, but the importance of looking at the flow of the basic resources needed for our global systems to work is demonstrated in this simple essay.
In the Economy Part 1 the Baltic Dry Index was introduced. This index follows the costs of shipping basic big bulk resources and indicates the flow of resources which will affect the economy. The Baltic Dry Index Chart below shows the peak of 11,793 on May 20, 2008 followed by the huge decline to 663 by December, 2008 (remember the great recession of 2009 following this drop in the flow of resources). This chart also shows what has happened with the resource flow since 2008 until now.
