In one of the previous articles (How we fought the economic cycle, or our path to slavery) dealt with the business cycle and the implications of trying to avoid it. Let's look at the issue once again and in more detail, or how the "destruction of the exterminated economy" arises.
Imagine two countries - the country of Kocourkov and the country of Kačerov. We have already met them in the article on euro and Greece.
Let's say that Kocourkov's GDP is at 1, Kačerov's GDP is at 2. In both countries there are the same number of people, so it seems that Kačerov is much better. In year 1, Kocourkov experienced GDP growth of 4%, so the value is at the level of 1,04. Kačerov is experiencing the same growth - growth of 4%. The value of GDP is therefore at the level of 2,08.
So it seems that Kačerov is on it even better than before, after all, the difference between Kačer 's GDP and Kocourkov' s GDP is as much as 1,04; while before it was only 1!
However, it is error. No one is better or worse, neither Kocourkov nor Kačerov. They are still the same, the level of their economy is up did not change each other. As already mentioned, no one is worse or better. Even if the two countries grow by 10%, for example, their economies are still in proportion 2:1 (Kacerov: Kocourkov).
Assuming that there are no other countries, the question therefore arises - experiencing Kačerov and Kocourkov with his 4% increase in GDP really grow? After all, they are de facto still the same. It's not more about stagnation?
Let us now look at the history of both our countries. If Kačerov is twice as good now, it has naturally had to grow twice as fast on average in the past. If Kačerov grew twice as fast as the rest of the world (ie Kocourkov), it means that Kačerov was experiencing an expansion, ie a "boom", right?
Well, if Kocourkov is twice as worse now as the rest of the world (than Kačerov), he has naturally had to grow twice as slowly on average in the past. So - Kocourkov, although "growing" (GDP growth), compared to the rest of the world experienced a recession, right?
And today, when both countries are growing the same, they are experiencing stagnation. No one is better or worse. The mutual level world-Kocourkov and world-Kačerov does not change. In the future, it can theoretically be assumed that Kocourkov's growth may increase and Kačerov's growth decreases, because it seems that Kocourkov's economic cycle is shifted by "half a period" compared to Kačerov's cycle. Of course, this is a very theoretical construct, don't take it seriously yet.
But in the real world, we don't have just two countries, two economies. The real world is much more complicated. To whom should we compare the GDP development of a certain country, such as the Czech Republic? To the USA? To Slovakia? What if these countries are experiencing an expansion or recession for us and it is different for another country? What if we are stagnating towards Slovakia and a recession towards Germany, for example? Then where are we?
The answer lies in world GDP, that is, the gross "domestic" product of the entire planet. In 2009, world GDP fell by 0,8%. The GDP of the Czech Republic fell by 4 percent, so we are experiencing a decline to the world by 1%. But how was it before?
Graphs 1a and 1b show the development of Czech GDP, which is “adjusted” (1a) for the development of world GDP (ie the difference in growth) from 1992 to 2009. And what do we see? Compared to the world, the Czech Republic grew only in the mid-2005s and then between 2007 and 1992. Between 1994 and 1997 we continued to decline vis-à-vis the world, as well as between 2000 and 2004. However, we did not improve much since then, because until in 2001 we can talk about stagnation. Growth was not even a whole percentage. It can be said that we have not improved much in the last eighteen years compared to the world. Also interesting is the development in the years 2004 to XNUMX, when our economy was going through "stagnation" - it was the CSSD that boasted of how, thanks to it and its investment incentives, we achieved enormous growth. Well, that wasn't the case.
But how are we doing compared to the eurozone?
Chart 2 shows the development of Czech GDP, which is "adjusted" for the development of euro area GDP (ie the difference in growth) from 1992 to 2008. At first glance, it can be seen that we are better than in comparison with the world. Sure, there is a decline in the second half of the XNUMXs, but it's not as strong as in the world. Subsequent growth is really growth. So we are catching up with the eurozone. But it also means the only thing - the euro area is necessarily wobbling around the world. And for almost 18 years.
Here we see it in full force, blue on white. The third graph shows us the development of the GDP of the euro area countries, which is adjusted for the development of world GDP (ie we see a difference in growth) from 1992 to 2007 - in fifteen years. It is clear that the euro area (hereinafter "the euro area") EMU) lags behind the world. It doesn't catch up with anyone, but on the contrary, most of the world catches up and overtakes it. The EMU countries have been "poor" since at least 1992, but if we draw the graph into history, we will find that except for the post-war 50s, when the continent was rebuilt after World War II, the GDP of the EMU countries does grow only very sporadically. Thus, EMU has lagged behind the world for almost half a century. However, the worst situation has been since 2, when the EU announced its "catch up and catch up" policy. It is quite clear that the EU not only did not succeed in this plan (it turned out to be a fiasco), but on the contrary, that the problems of the EMU countries deepened. Until the year 2000, it could be said that the trend was + - growth, ie that the decline was slowly but surely decreasing. However, developments since 2000 have completely reversed this trend and vice versa - the decline is deepening.
However, although the development is a bit wild at first glance, if we look at graph 3 and graphs 1a and 1b, we notice an interesting difference. While the euro area countries grew somehow over time (in the long run) (50s), then "stagnated" and then began to decline relatively quickly, in the Czech Republic the development is a little different. It is much more like the "exemplary" business cycle we see in the very first picture, at the very beginning of the article.
Chart 4 shows the difference between the development of euro area GDP and the development of world GDP from 1961 to 2008, ie over 47 years. The trend is clearly declining, and the peaks are lower. And this brings us to the title of the article - the "smooth economy".
In the article "How we fought the economic cycle, or our path to slaveryI wrote that politicians, by intervening in the economy, tried to avoid the economic cycle and thus ensure "endless growth." However, they only sought "endless growth" in their GDP as such. The comparison with the world is (you could say) "not interested".
So what were those politicians doing? Mostly though threatened to collapse Larger and more significant companies rushed to help the state with it saved. He grew huge "employee protectionism", When after the Second World War and in the West we experience great "Boom" of employee protection lawswhich also increased the impact unions (which were often supported by the state). The labor market has lost its flexibility and already large companies so they started To "tie" more and more capital and labor. Companies were formed that were "too big to fall„. After all - in today's crisis, these companies are being talked about more and more often. Whatever it is General motors, large financial institutions or European car manufacturers.
With the greater power of trade unions, more and more long-term (usually annual) collective agreements between employees and employers began to be used, which also included wage growth, including inflation expectations. As a result, manufacturers and suppliers more often resorted to longer-term contracts, as they needed to cover their pre-contracted costs (for wages). And even in these contracts they offset their inflation expectations (according to the wage agreements). These contracts between manufacturers and suppliers led to the same as employment contracts. It increased inflationary noise on the market, ie those who moved on the market, could get worse and worse cen. The market is increased the number of "false signals"when, together with increasing extent (whether overt or covert) regulation markets were still functioning worse and worse.
States de facto during the last half century carried out targeted market destruction. It is absurd that today they wonder how markets often do not work.
New Zealand underwent a tremendous reform in the second half of the 80s, when a major one took place liberalization of the economy. They were fast reduced taxes, abolished agricultural subsidies, was introduced floating exchange rate, reduced influence central bank, import duties and quotas are abolished or reduced, the post office, railways, airlines, telecommunications were privatized. Much has been done, and today this reform is spoken of as one of the most successful reforms of the 20th century.
After 1960, a new course was set in New Zealand as in the rest of the world - the tax rate increased, protective duties were introduced, state more and more redistributed more, labor law was for employees protective. From a previously successful New Zealand, it was slowly but surely becoming lagging and indebted New Zealand. The development trend until the end of the 80's was decreasing.
Only the liberalization of the economy, when the state withdrew from the markets (ie interfered less with them), reversed this declining trend - we see that the development trend of New Zealand is currently increasing. Despite tax cuts, New Zealand had surplus budgets in the 90s.
Let's compare the results of New Zealand reform and the European plan to "catch up and overtake" - which is more successful: liberalization and "shrinking the state", or greater redistribution and "market management"?
If we look at the development of the eurozone, where over the last 50 years the tendency to "manage" markets and ensure "endless growth" (GDP) has become more and more prevalent, and if we compare it with "liberal" New Zealand or very relatively liberal Czech Republic, we can notice interesting things - the more the state tries to "smooth out" economic development (ie the more it fights against the economic cycle), the worse the results of the economy. Why? This has already been said above Chart 5. The state, by interfering more with the economy, gradually liquidates the markets, thereby liquidating the whole economy, as the state slows down their development and prevents change.
It can be said that a completely controlled economy would theoretically look something like this:
Maybe if we looked at a larger period of "smoothed out" the economy, we would find that it is still about the same economic cycle, as shown in the very first figure. Why?
Let's look at the land of Kocourkov. She decided to plan and manage her economy. First, the state nationalized all the companies, installed its people there, and then began planning.
It was quite good in the beginning. Many new flats were built, 110% were produced, and the first few years were quite successful. Then came stagnation - so what, the "leaders of the state" said to themselves, it doesn't matter, at least we still have the same. But after a few years, the decline came - and it did not stop. What happened?
They still existed in Kocourkov the same companies. Sometimes a company started doing something extra, sometimes a new one has been established. But companies did not fail, holding up to a greater extent did not develop, did not change. Markets "they froze„. But what changed was human preference and human motivation. People just after a few years they wanted something different than what they wanted before. However, because markets have hardly changed (or have changed minimally), markets have changed demand either they can't react at all, or up to with a long delayhowever, when human preferences change again and the "market response" to this fact continues to grow. After a long stagnation, it will come black market slump and boom, gray economy.
The dissatisfaction of the population is growing. There are many scarce goods available on the black market, but at a much higher price than what goods would be available on the regular market, because goods on the black market are logically also rarer, obtaining them is also riskier, usually exchange actors also have higher transaction costs. However, along with the goods, it also spreads on the black market "Black information", ie "behind-the-scenes gossip" about how a centrally managed economy works badly.
But one day the day will come dissatisfaction more reaches the top and the people will overthrow the government and turn the trend towards smaller state and a freer market. The economy will start to grow slowly but surely. Economic the cycle is complete, but he persisted much longer and cost all much more money, nerves and maybe lives. The economy as such can recover from the "management shock" very long.
Thus, it can be said that the first half of the economic cycle (expansion, peak - stagnation and decline) from a short period is a picture of the development of a "smoothed" - ie managed - economy in the long run. It's logical because market management slows down their development. However, the decline is much deeper and consequent restoration is more expensive.
The question is when there will be such dissatisfaction with the development that there will be a "regime change" - whether it is during a period of stagnation, or at the beginning of the decline, or after a long decline, when the decline reaches its "bottom". However, the decisive factor will be how much the state controls the "information market" - the more it controls it (and the more it can fight the "black market" with information), the later there will be a change.
The development of the economy in the euro area and in the European Union as such is increasingly similar to the development of a "smoothed out" economy. Markets are slow to react as the state's influence on them is high - this can be seen in European agriculture compared to New Zealand's agriculture, which has become the most competitive agriculture in the world after the abolition of subsidies and the reduction of state influence.
Where will Europe go?