Wednesday, December 1, 2010

An Analysis of the Current Economic and Social Malaise, and How We Can Get Out of It – August 29, 2008

<Note: This article was written on May 9, 2008 by Luke Ho-Hyung Lee.

At the time this article was written, The 2008 Olympic Games were on and the presidential candidates had picked their running mates: Obama picked Joe Biden and McCain picked Sarah Palin to round out their tickets. The presidential campaign was entering its final months.

But all was not well in the financial community. The Dow Jones descended precipitously from August 29, 2008 (when this article was completed) to 9,319 on election eve (November 3, 2008). And, it would drop even more before it hit bottom. All was not right in the markets. I thought then that we were too focused on fixing only our most immediate economic problems instead of trying to solve the structural gap itself. That is, instead of trying to recover the self-generation capability of the market which was impeding the balance and development of the market, we were allowing ourselves to be ruled by our myopic vision of the present -- the housing market collapse, sub-prime mortgage failures, financial market meltdown and credit crunches.

I advocated then still do that a market system be developed with multiple-source based networked communication, in order to have a more efficient e-marketplace, with a fair rule and standard. Only then would we be able to right the wrongs of the past. I have not changed my mind in this view.>

Information Technology (IT) has brought many great changes in the Modern Information Age. But the greatest one is yet to come. It will be when the existing single-source based communication system has fully developed into a multiple-source based communication system, and further again to multiple-source based networked communications.

When market systems had only single-source based communications that were linearly constructed, only linear or arithmetical changes could be expected from them. Examples of Linearly Constructed Market Systems include: Three-Tiered Functional Market Systems, Two-Tiered Functional Market Systems, E-Retailer Market Systems, and E-Buyer Market Systems. Most of these have proven to achieve far less than they could have.

As market systems first developed with multiple-source based communication, into two-dimensionally constructed market systems, progressive changes could of course be expected. However, it is difficult to construct an efficient e-marketplace, with fair rules and standards with only a simple, two-dimensionally constructed market system. The market is directly restricted by time and space, so the degree of the actual changes will not be significant. Examples of Two-Dimensionally Constructed Market Systems are: E-Marketplace Systems (like EBay’s Marketplace System). Yes, EBay’s system is far less efficient than it could have been.

When market systems are developed with multiple-source based networked communication, it will be possible for an efficient e-marketplace, with a fair rule and standard, to be constructed comparatively easily. From these three-dimensionally constructed market systems, geometrically progressive changes can be expected. Unfortunately, there has been little recognition in the market of the necessity of, or even on the existence of three-dimensionally constructed market systems. Companies like Ebay are reluctant to change a business model that has made them a billion dollar company. Accordingly, there has been little interest in developing them. That is about to change.

On the other hand, three-dimensionally constructed information systems with the base of multiple-source based networked communications have been well developed. We have had the capability of producing numerous geometrically progressive changes in the information market. (Examples of Three-Dimensionally Constructed Information Systems include: Internet Explorer, Google, Numerous Software Applications, Digital Contents, and Digital Synergies)

Likewise, geometrically progressive market changes have been possible by using the three-dimensionally constructed information systems; while on the other hand, the market results made through the market process which comprised the existing market systems could still have only produced arithmetical or limited progressive changes. As the requirements made through market changes could have been satisfied only by the results made through the existing market process, a structural gap has existed in the market. The more the modern information market has developed, the more the self-generation capability of the market itself has been damaged as well.

Major defects resulting from this structural gap have already appeared. They include, first, a steady worsening of the employment condition (or the steady weakening of job-creation capability) for lower- and middle-income people; second, the slowing of consuming effects on the products and services that cannot keep up with the speed of market changes. Accordingly, the inequality of earnings between affluent and poor was aggravated. Because these phenomena were unrecognized, a serious imbalance and vicious cycle between the supply side and the demand side occurred in the market. This led to a serious recession, not just a “languishing” of the economy, or a mere "slowdown" in the business cycle.

It seems that we have focused on fixing only the most immediate problems over the last several years, instead of trying to solve this structural gap itself. That is, instead of trying to recover the self-generation capability of the market which was impeding the balance and development of the market, we have relied too much and too long on the existing expansionary and stimulus economic policies to balance the development of the market.

To be sure, temporary balances were achieved from time to time through similar expansionary and stimulus economic policies. But the effects of those policies were easily stunted by the already damaged self-generation capability of the market. Thus these policies had the unintended consequence of exacerbating many abnormal phenomena in the market. Thus, while the self-generation capability of the market was continuously weakened, bubbles formed in the equity market owing to the abruptly increased monetary liquidity. Federal and state budget deficits have increased uncontrollably. Welfare expenses have also risen rapidly for the growing “missing class” (or near poor class). Consumer spending power has fallen steeply and consumer savings rates have sharply dropped to 0% or less. (In other words, people were spending more than they were earning.) Moreover, because of increased monetary liquidity in the world market, a weak condition for inflation pressure has been introduced into the domestic market.

Reviewing the past year, one can easily recognize the current economic and social problems we are facing, such as the housing market collapse, sub-prime mortgage failures, financial market meltdown, and credit crunches. They are the result of these abnormal phenomena which have accumulated in the market. Because these abnormal phenomena still exist, it can be safely predicted that more economic and social problems lie ahead – unless we do something about it.
It seems that the government has adopted a plethora of policies to revive the economy, occurring almost daily. The Fed has joined in, going beyond its role of monetary regulator. That is, it seems that the government has fallen into a defensive position. Policy makers have unimaginatively relied on methods that worked in the past, but have little efficacy now.

Many economic experts still propose expansionary and stimulus economic policies despite having little confidence in their success. Some suggest economic revitalization through infrastructure improvements. We may be able to escape the crisis once or twice with these policies. Eventually, however, we will face bigger crises in the midst of revelations of other concrete economic and social problems. This will eventually lead to a bigger economic catastrophe than we have ever experienced before.

The economic and social problems which currently afflict us are caused by the structural gap between the market requirements (which have rapidly changed and enlarged in the modern information society) and the market results, which cannot satisfy them. That is, they are the results of the weakened self-generation capability of the market itself. The only viable solution for this structural gap (the weakened self-generation capability of the market itself) will be the application of three-dimensionally constructed market systems developed along with multiple-source based networked communications. We are now at that stage. Therefore, if these three-dimensionally constructed market systems are not developed soon, especially in view of the rapidly worsening economy worldwide, I predict that we will not be able to avoid a serious economic and social catastrophe in a very short time to come.

Fortunately, the personnel, material and technological resources for developing these market systems are already in place. Therefore, even though there may be some side effects, by taking the initiative now we may not only avoid catastrophe but can turn this misfortune into a blessing. Our national competitiveness and prosperity will be restored.

I believe this is the most urgent issue that all Americans are currently facing. The new president, his team, the Congress and business leaders should work together to make the restoration of prosperity our major goal in 2009.

Author: Ho-Hyung Lee ( - 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).

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