It’s Time to Change the Process - 2/11/08

<Note: At the time this article was written, the 2008 presidential campaign was in the early stages of the Republicans and Democratic primaries.  Both McCain and Obama were gaining early leads for their partys’ nominations.  The Dow Jones was in the 12,000’s, a considerable drop from its lofty perch above 14,000 a year earlier, but not as bad as things would become as the election approached in November.   Voters were decidedly worried about the economy by election day.  They had good reason to be worried.

            

The candidates were giving lip service to the issue of economic change – both of them.  Neither of them understood the kind of change that would be needed.  I thought we were in economic trouble then and still do.  The sub-prime mortgage failures and the housing market collapse were cause for concern.    In order to improve employment and promote investment, the Fed was lowering interest rates and the economic stimulus was in full swing.  I didn’t  think then they would work; it seems they haven’t.  Some people were still not comfortable calling it a recession yet, but I knew better.  It turns out I was right.  But in one area I haven’t changed.  The kinds of change I was calling for then are still the kinds of changes we need nearly three years later.

            

I advocated wholesale changes to the market process then, and still do.  It is a theme I would come back to over the next several years.>

For voters, “change” has become the byword of this presidential campaign as it moves towards its conclusion.  But all too often, when politicians call for change, it is not always clear what changes, if any, they have in mind.  Yes, change is in order.  But none of the candidates I’ve heard so far are offering the kinds of change we desperately need.  They’re offering quick fixes – which is exactly what we don’t need.

We are in economic trouble.  You can call it “downturn” or “slowdown” if you want to, or even call it what it is – a recession.  But even that would not capture the kind of economic troubles that lie ahead, if someone doesn’t do something about a market process that caused the current economic malaise.  No quick fix will repair the damage this time.

When someone aspires to the presidency and calls for change, one hopes that he or she has “vision.”  Otherwise, change for change’s sake is useless.  That being said, none of these candidates offer a vision for the Modern Information Age.  The Fed’s lowering of interest rates and the economic stimulus package will not forestall the inevitable catastrophe.  None of these actions – let alone wishful thinking -- will do any good if the market process is not overhauled, and overhauled soon.

The rapid spread of information has brought major changes to the qualitative lives of individuals over the last twenty years.   But this is misleading, for the gains are rapidly being overtaken by the costs to society as a whole.  Weaknesses in the overall efficiency and effectiveness of the process call into question those who like to sing the praises of the internet and the shrinking of the world from globalization.  With no changes in the accompanying market process, these gains can no longer be sustained.  If the economy collapses, then all of those gains will have been for naught. 

With this in mind, let’s see what has happened in the market and society for the last twenty years, so that we can avert the collision course we are on.

With the rapid and economical spread of information, all of the individual units on the supply or social service provider side greatly increased their productivity and product or service development capability. On the demand or social service (beneficiary) side, all individuals’ knowledge has increased greatly, and this must have been directly linked to the escalation in the needs and wants of consumers (or social service beneficiary).  This is what the Modern Information Age has spawned – and it has also given us a false sense of security, too.

Since the market and/or social process, which comprise the systematic series of individual actions, have not been changed significantly, some abnormal and unbalanced conditions have occurred in the market, such as:

1. While the needs and wants for consumer spending and social services have rapidly escalated, the consuming effect of products and services supplied from the supply side and the social service effect of services provided from the social service provider side have not increased much. That is, the desire for more consumer spending power along with increased consumer price sensitivity must have been raised significantly, while satisfaction for the social services side must have de-escalated significantly.

2. The employment situation has been aggravated at the same time, and this must also have worsened the situation of consumer spending capability on the demand side and increased the demand for social services. 

3. As a result, a serious imbalance and a vicious cycle between the supply or social service provider side and the demand or social service beneficiary side also occurred.

To overcome this situation we have adopted a series of economic stimulus policies (nothing new here) to improve the employment picture by promoting investment and consumption, rather than trying to change the outdated market and/or social process. Ironically, these measures have not only been ineffective in stimulating the economy, but also created numerous abnormal phenomena in the market and society. These include an abrupt increase in the bubble phenomena of the equity markets across the board, and an increasing economic strain on those in the lowest income bracket.  These phenomena will continue bringing numerous economic and social problems like the sub-prime mortgage failures we have witnessed in the past year.

The ratio of employment to investment and/or consumption has been rapidly decreased in the Modern Information Age. The employment figures improved by temporarily promoting investment, while consumption could not have been increased as much as desired. 

The recent economic stimulus policies of the Bush administration have been enacted mainly to increase monetary liquidity and the net wealth effect in the market or economy, instead of stimulating the economy itself as it proposes to do. The necessary level of consumption could have been relatively easily maintained to ensure what seemed a sound economy by using easy credit, that is, by increasing the debt.  On the other hand, the economic self-generation capability of the market or economy has been weakened seriously, and numerous potential economic and social dangers have accumulated.

Now, we are facing new economic problems such as the sub-prime mortgage failures caused by the housing market collapse and the credit crunches of financial markets.  To overcome this situation we persist in enacting ineffective economic stimulus policies without trying to restructure the outdated market and/or social process.

Let’s summarize our present market situation:

·      The inflation possibility is increasing seriously.

·      The net wealth effect is rapidly diminishing.

·      The credit market is tightened significantly.

·      Consumer saving rate is almost zero or in a minus situation.

Even if the Bush administration institutes the aggressive economic stimulus plan and the Fed keeps the interest rate at its current level, it will not stimulate or revitalize the economy.  Instead, other unrealized economic and social dangers such as inflation and social unrest might take their toll.

Therefore, to minimize further economic and social damage and to revitalize the economy, we should start finding ways to change the market process as soon as possible. Market process comprises the systematic series of individual economic actions that are the market systems. That means, we should start developing new market systems, which are more suitable for the Modern Information Age, as soon as possible.

The new process with more suitable systems for the Modern Information Age we develop will significantly increase the consuming effect and the social service effect. It will greatly improve the ratio of employment to investment and/or consumption as well.   Information technologies, facilities, devices and people are already in place to develop these new market systems.  Now is the time to change the market process. We should not let this opportunity slip away.

Therefore, I strongly recommend the presidential candidates and the outgoing administration focus on developing a new market process.  This should be their primary economic focus. 

Author:      Ho-Hyung Lee (luke.h.lee@gmail.com) - Ho-Hyung (“Luke”) Lee is by training a lawyer, an international businessman and entrepreneur – and an inventor.  He is currently the president of Ubiquitous Market System, Inc. (UbiMS).