Market Overview

An Exercise in Economy, Bureaucracy, and Productivity

Let us suppose for a moment that somewhere in the world there is a lost Dutch colony on some small, isolated lost island. A holdover from the colonial age in the 18th and 19th c., let us call this hypothetical Dutch colony "Verlorenstad".

Isolated from the modern world, the Dutch colonists continue to live without modern technology. Though the island is small, there is ample space for the colonists. Verlorenstad has little farmland and the island's inhabitants eat vegetables sparingly; thus, there are no cattle, sheep, or horses in Verlorenstad. The island's population has remained relatively static over the years at around 5,000 people owing to the colonists' lifestyle. For the sake of the hypothetical, let us say that the Dutch colony even has its own currency: the florin. Let us say that one florin in the Dutch colony has been historically equal to about ten fish on the open market.

The economy of the island of Verlorenstad is based on the fishing industry -- particularly mackerel. To make things simple for the sake of our discussion, let us assume that the colonists have communal access to water and mainly subsist on fish for food. As there is a limited amount of currency, there are no banks. Owing to the solidarity of the colonists, there is little need for law enforcement and courts. In terms of nourishment, yes, the colonists eat other things like tubers and berries, but these are found on public land and do not affect the fish industry's dominance in supplying food for the colony. Though Verlorenstad's economy is somewhat stagnant technologically and though Verlorenstad's standard of living neither improves nor weakens, the island's economy remains stable given the circumstances.

Of the total population of 5,040 citizens in Verlorenstad, (for numerical simplicity) let us say that the colony enjoys a generous labor participation rate of 60%. Thus, the colony has a total labor force of about 3,000 citizens.

There are only two possible occupations for laborers in Verlorenstad: clerk and fisherman. Both the clerk and the fisherman are expected to work eight hours per day five days per week. Let us assume for the sake of the hypothetical that most services, housing, medical care, education, et al. are all managed by households individually or by the community at-large, i.e. outside the marketplace. As for the market, the fishing industry is king and the predominant source of food in the colony. All other things being equal, the market for fish in Verlorenstad has a diverse number of competitive producers and each fisherman catches a comparable amount of fish to the other fisherman, i.e. there are no oligopolies or market disruptions in Verlorenstad's fish market. The price of fish for consumption is left to the free market.

Now let us posit that the lost colony of Verlorenstad has a gross, excessive bureaucracy, courtesy of the colonial government. The bureaucracy is called the "Bureau of Efficiency" and consists of multiple clerks all earning comparable daily wages in florins. The job of the clerks is to document and record the amount of fish caught by the fishermen. Yes, the fishermen can document their catches on their own, but for the sake of bureaucracy and government regulations the clerks make pointless, detailed records of the catches. The clerks serve no other purpose than to bureaucratically record and document fish caught by the fisherman for government purposes.

As fish is the only food commodity, the Dutch colonial government takes into account catches of fish for distributing wages in the community. The colonial government pays clerks out of taxes levied upon the fishermen. Some clerks work in their own agencies outside of the government, but most clerks work under the umbrella of the colonial government.

Every time a fisherman makes a substantial catch, a clerk takes record of the number of fish caught and the fisherman signs the clerk's record. Then that clerk passes the information to a second clerk who looks over & signs the first clerk's record, documents the information, and gives it to a third clerk. The third clerk then looks over & signs off on the second clerk's work and enters the information into a colonial library. Other clerks working in the library copy these numbers into various bookkeeping records for the sake of the Bureau of Efficiency. In terms of actual toil, a fisherman's job is much more difficult and risky than that of a clerk's job, which is safer and easier. Whereas the fisherman is outside in the elements rain or shine, the clerk spends his time in a warm, dry building.

Of the 3,000 citizens that are in the labor force in Verlorenstad, 2,000 individuals are in the fishing industry and 1,000 are clerks. Even though some of the fishermen may at times get frustrated with their work in comparison to clerks, the system is able to continue as wages are comparable and everyone enjoys a similar standard of living.

Verlorenstad's economy continues for some time until one day a powerful storm hits the island and causes great damage. Fishermen discover that much of their fishing equipment has been destroyed, and clerks discover that many of their records have been ruined. To complicate matters, the supply of fish caught has mysteriously begun to shrink for no apparent reason. To deal with the crisis, the colonial government assures the colonists that everything will be okay and that the government has prepared for such a crisis and has a limited emergency supply of fish to distribute.

Several weeks later, as the fishing industry collapses colonists on Verlorenstad begin to look for alternative sustenance in native vegetation like edible leaves, tubers, and berries. People then begin to demand a greater amount of native vegetation for food, but given that the vegetation is off the free market & on public land, in time the supply of vegetation is depleted. In the midst of the crisis, the bureaucracy goes downhill as there is a surplus of clerks with nothing to do.

While wages appear to be flowing continually, fishermen begin to get frustrated watching various clerks manage worthless and pointless documents while the fishermen themselves are doing all the physical labor to sustain the colony. As such, fishermen begin to horde the fish that they do manage to catch and exchange with other fishermen in times of bad fortune in order to feed their families. While the clerks in the Bureau of Efficiency continue to receive wages courtesy of the colonial government, the value of a florin declines. Where a florin was once worth ten fish, after the crisis one florin is worth three fish.

A few months after the storm, the florin depreciates to the point of worthlessness. In the aftermath of the crisis, one florin is worth a third of a fish. Furthermore, the fishermen have for the most part abandoned the florin and use an alternative currency called "vissen" (reflective of the physical commodity of fish caught) for trading purposes. While some of the clerks have abandoned the bureaucracy trying to make a living in the vegetation industry, many clerks continue to sustain the government bureaucracy to no avail. Some of the clerks leave the bureaucracy to either work for the struggling fishing industry or to broker deals on the fish market as speculators.

As the situation stabilizes itself over time, the colonial government decides to abandon many of the bureaucratic regulations that clerks of the Bureau of Efficiency recorded and documented because there remains no way of duly enforcing the regulations. Whereas the florin has been completely abandoned by the colonists, the new currency vissen are now used for business transactions in the community. At this point, the government has been reduced to its essential functions, the bureaucracy has shed much of its previous weight, and the citizens of Verlorenstad have become more productive in either the direct fish industry or the secondary fish markets. Other citizens have begun to experiment in cultivating alternative sustenance in vegetables.

The eventual conclusion of the stormy crisis on Verlorenstad settles as the Dutch colonists come to terms with the new economic system and look forward to the uncertain future...

***

To say the least, economic life is much more complex than the above allegory, but the moral of the story is that excessive bureaucracy is in the long run counter-productive and a waste of precious time & resources. Obviously, such an island like Verlorenstad would have an array of socio-economic problems and would require a diverse marketplace including banks, boats, construction companies, tailors, doctors, and farmers. The colony would also require courts, police, and tax-collectors. In time the marketplace would have to grow to survive. A small island like Verlorenstad could grow to one day have a stock market of its own selling shares of fisheries, farms, fish distributors, and other merchants. Even so, even with a growing marketplace the downside of an excessive bureaucracy comes to light eventually. In a time of crisis a society works to shed bureaucracy to become leaner and more efficient in its financial bargaining and business transactions.

In times of crisis the value of bureaucracy is weighed in light of economic efficiency and productivity. As in the case of any economy, the name of the game is perpetuation of the species. In order to achieve perpetuation of the species, we require productivity.

Aside from any issues pertaining to the realism of the above example, the point is that excessive bureaucracy does not make for productivity in an economy. Bureaucracy may appear to be productive and some aspects of the bureaucracy may be genuinely productive, but in the end, bureaucracy dampens investment & the free market and citizens are left holding the bag for its costs. Nonessential bureaucracy may give off the appearance of productivity, but this is like a man who is paid to dig holes in the ground and is then paid to fill them back up. This Keynesian hole digging scheme may appear to be productive, but any possible "productivity" in the Keynesian hole digging scheme is not the same as the productivity involved in farming with the intention of reaping a harvest or cutting down trees with the intention of using the product as firewood.

Productivity means working to transform or use a commodity for a marketable purpose, i.e. output after input to produce something. When the output becomes less valuable than the input, you have an economic problem. In the case of excessive bureaucracy and paper-pushing, one has to compare the anticipated benefits of the bureaucracy with its costs; this cost-benefit analysis becomes crucial during a crisis.

When there is more paper-pushing and red tape than actual productivity in an economy (unless of course your entire economy is based on the financial services sector; that scenario has issues of its own), the society and the economy are going to be that much more fragile. A society that has a substantial bureaucratic burden while not being able to support itself is going to be vulnerable to calamity. The society, the government, and the economy will have to work that much harder to sustain the gross bureaucracy. It does not matter whether the bureaucracy comes from the government or the market itself; because gross bureaucracy can stunt business thereby compromising financial self-interest, it is more likely that gross bureaucracy would come via government mandates.

Even so, with a gross bureaucracy a society is that much closer to disaster -- or in the case of a disaster, individuals become that much more vulnerable. This is because when crisis hits, disaster strikes, or the economy contracts, no one needs someone sitting behind a desk pushing papers. Rather, people need goods necessary for survival.

In times of crisis and in times of economic contraction, the free market (with a stable system of law) pushes individuals towards productive sectors of the economy. Whereas bureaucracy and pushing paper as in the case of government regulations may give the appearance of productivity, they do not add any relevant quality or productivity to the economy save for qualifying various products and processes.

At times such excessive bureaucracy can appear to be worthwhile in making products and processes appear safer, but in time the free market is able to qualify products and processes on its own. You don't need any government certification to differentiate Coca-Cola, Pepsi, RC Cola, Inca Kola, and store brand cola. However, if the government wanted, it could create a "Bureau of Cola" and regulate the cola soft drink industry. Such bureaucracy could be more efficiently dealt with in the free marketplace. When the government chooses respective areas and factors to regulate rather than the marketplace, the result is maldistributed resources.

Of course, in the above Dutch colony example, no man is an island and man cannot live on bread alone. One could argue that the colonists in Verlorenstad must have certainly needed clothing, housing, and other basic services that would have contributed to the economy. That would be a worthy response. Nevertheless, the situation of the Dutch colonists in Verlorenstad was partly inspired by the lifestyle of the Inuit in North America where most food was based on hunting and fishing. Even so, the Inuit required clothing and shelter, but this could have been managed on a household or community basis rather being managed in the marketplace.

We take for granted that things like haircuts, clothing, and entertainment can be managed on a community or household basis. Could you imagine a scenario where most people regularly received haircuts from the maternal head of the household rather than going to Supercuts, Great Clips, or Best Cuts? Such a scenario would drive hairstylists out of business. Of course, in our culture we have a robust service industry, but this is not essential to make an economy work. As an economy contracts, people have less money to spend on things like haircuts, new clothes, or going to see movies; this can complicate an already struggling economy.

What is essential to make an economy work consists of goods necessary to survive. Once individuals' physiological needs are met, the economy can possibly expand into other sectors. Bureaucratic intervention by the government if left unchecked over time can slow down the growth of a city, a state, and a civilization. Even worse, in the event of crises, government-mandated bureaucracy can cloud the nature of the market and can make an economy much more sensitive to shocks as individuals are diverted from more productive sectors of the economy to less productive sectors.

For the aforementioned Dutch colony and any economy for that matter, the key is productivity, growth, and innovation. As bureaucracy wanes and productivity, growth, and innovation in a free market are fostered, a society and its economy become that much more viable and functional.

Posted-In: Politics Psychology Topics Economics General Best of Benzinga

 

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