New Economics favour China and India

Joergen Oerstroem Moeller | 05 Oct 2020
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One of the fundamental laws of economics has been turned upside down. For two centuries, conventional wisdom had it that the law of scarcity reigned supreme. What was scarce commanded a high price – gold is a case in point – regardless of its impact on and usefulness for the real economy.

This law has now been replaced by what I would label the law of abundance, explaining a good deal of what has puzzled economists for the last 15 years - that is high growth, low inflation and high productivity, at the same time and over a long period.

Consider the following examples.

A city has one million cars. The next car to be purchased may increase productivity somewhat for the owner but reduce productivity for all others, and on top of that bring along external diseconomies in form of environmental damage augmenting anti-pollution costs. So all in all, the cost-benefit analysis leads to a negative result for society as a whole when one more car is purchased.

The same city has one million mobile phones, one million PCs and several hundred of thousands on broadband and thousands on skype. What happens when one more user makes his/her entrance? Productivity goes up for that user, but productivity also goes up for all the other users of mobile phones, PCs, broadband registrants and skype users. The effect is the reverse of the car case in an industrial society, and there will be little if any external diseconomies. Those we see will be confined to recycling of batteries etc. which, if already in place, is not affected very much by the numbers.

The value of ICT (information, technology, and communication) gadgets increase with the numbers already in use. This positive effect applies to newcomers as well as to those already in operation. The larger the number, the higher the overall productivity for the economy as a whole. The smaller the number, the less attractive they are. Who would be interested in a mobile phone or a PC, if only a handful owned and operated these gadgets?

Further, investment in such gadgets is less burdensome for the economy than compared to industrial goods – no highways, no bridges and no need for hospitals to care for traffic victims, although base stations and repeaters stations do need to be built and positioned somewhere.

Many of the gadgets we talk about here are a mixture of consumption and investment. The person acquiring a PC or a mobile phone enters the game of blurring the division between work and leisure. Conventional wisdom posits, not surprisingly, that investment increases productivity, but the new observation is that high and rising consumption, focusing upon these sorts of consumer goods will actually do the same. Consumption goes up, so does productivity - a totally new phenomenon in the theory of economics.

The boom of the US economy over the last 15 years is very hard to explain if one is armed with traditional economic theory. Switching to the combination of high consumption as a productivity booster and the effect of all the new IT gadgets working their way through the economy - the pieces fall neatly into place. The law of abundance has given birth to this `miracle`.

This phenomenon also provides a clue to the future shape of the US economy. As the panoply of IT gadgets seem to approach what may be termed a state of saturation, it is unlikely that the same positive effect will continue to control the economy. Even if one more mobile phone still means higher productivity for society, decreasing returns to scale will certainly be in evidence. This presages slow growth, lower productivity and probably also, a rising rate of inflation in the years to come.

The role of China and India in the global economy may soften the impact of a US economic slow down as they still are in the early stages of high consumption, combined with introduction of IT gadgets. China has a little more than 431 million mobile phone subscribers, rising 44.9% from a year ago, 123 million internet-users, up 20% from a year ago, and 77 million on broadband, rising 45% from a year ago. India is adding several million mobile phones every month.

These two countries have entered into a sustainable phase, where each new mobile phone, each new PC, each new subscriber to the internet (and especially broadband access) will increase overall productivity in the country as a whole.

When assessed against the impact of abundance on the economy, one cannot escape the observation that numbers matter. China and India stand at the door, ready to enter a new phase of economic growth promising rising productivity, high growth and low inflation.

The numbers game will be decisive. Conventional theory asserts that more capital and labour increases productivity, but less so than in the early days of economic development. China and India will for a long time, be located on the upward bend of the curve viz. increasing returns to scale of total productivity flowing from ICT. The large number of subscribers that ICT gadgets ride on, will generate a long and sustainable cycle of growth.

The world is not in for a "miracle" looking at future productivity growth in China and India. The logic of the law of abundance is actually quite simple. But it will change how we look at global economics.

Joergen Oerstroem Moeller is a Visiting Senior Research Fellow at the Institute of Southeast Asian Studies, and an Adjunct Professor at the Copenhagen Business School.

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