VALUE VS PRICE IN A GLOBAL BUBBLE ECONOMY

The beauty of economics is that human nature is constant. Hence, the outcomes of economic calculations, estimates and theories only change when new variables are added or old variables fall away. For example, the introduction of financial innovations, the globalisation of the economy or the internet are such variables that have been added to the equations. If approached correctly, understanding the human nature is an easy task; ultimately, we have thousands of years of valuable work on this topic. Consequently, understanding economies and even managing economies are one of the easiest tasks of statesmanship, in theory.

However, some things went terribly wrong: the contemporary economies of the world do not reflect their true values. This is so, because the global gross domestic product (GDP) increase does not reflect the characteristics of sustainable growth - and this the case now for the last 50 years. Sustainable growth, however, is not merely confined to environmental protection, but rather to be understood as generally healthy growth. Let us think about a car that is driving in the red area of its revolutions per minute: it moves forward really fast, but in the long-run the engine will be destroyed. However, it would also be wrong to assume that there is a fixed number that describes the perfect growth rate, because slow or linear growth is not necessarily always better. A departure from the numbers is needed to understand the problem at hand.

With the abandoning of the fixed exchange rate regime in the early 1970s, established by the Bretton Woods agreement in 1944, the economies of the world were forced to expand internationally. Behind this development is the Impossible Trinity Theorem, which posits that no state's economy can have an independent monetary policy, fixed exchange rates and unrestricted flow of capital simultaneously - every state needs to forgo one of these three desirable structural aspects of their monetary policy. The logic is simple: in a fixed exchange rate regime, there cannot be unrestricted capital flow, as market dynamics will influence the exchange rate. If it stays fixed, then the economy will work inefficiently. However, if there should be free capital flow and fixed exchange rates, a state needs to tie its monetary policy to another country, like Saudi Arabia tied its Riyal to the American Dollar. This would mean complete loss of sovereignty over the national monetary policy, which, in turn, means that the state becomes inflexible in that regard.

So, with the collapse of the Bretton Woods system, the economic game switched to a fundamentally different set of rules. All of a sudden, economic actors became exposed to international competition, but this also meant access to global information, innovation and cooperation. In the lax regulatory environment of the post-Bretton Woods order, the relatively uncompetitive markets offered sheer endless opportunities to earn money. Corporations became increasingly active in finding new ways to make money, which was also accelerated by the invention of the computer, the internet and financial technologies. The euphoric development gained further momentum in the mid-90's to the mid-00's and was drastically stopped at the end of 2007, when the global recession began.

How does that all connect to healthy economic growth? As mentioned before, human nature is constant. Our behaviour can be shaped by structures, but regardless of the subjective side of the behaviour, it remains constant. One of the relevant characteristics of the human nature is that we are in a continuous balancing act of individual interests and societal interest; in other words, we are in an everlasting battle between anarchy and order. The corporation seeks new ways of tax evasion, while the government introduces mechanisms to prevent that; the hacker develops a way to gain bank account information and the bank invests another million in its IT security system - the examples are never-ending. Equally, macroeconomic developments are characterised by this continuous struggle. Once globalisation accelerated, companies tried to expand in every way possible - often by behaving unethically. Unfortunately, governments were reluctant to intervene and create a more reasonable framework for growth. But how can we blame them? It was a completely unfamiliar situation and the growth rates sounded too good to be true and turned out to be fantastic campaigning tools on top of that; in short, politicians had no reason, or interest, to stop the growth.

Unfortunately, the results are more than tragic. Beginning from severe environmental damages, over to economic wars, societal devastation and large-scale exploitation of many countries, all the way to the global financial crisis, the Euro crisis and large-scale production scandals, we are now paying the price for growing too fast in the past. Obviously, we are now used to many goods, products, services and processes, that we as consumers are unwilling to make sacrifices; as we can see with the lengthy and exhausting transition process to electric cars. Today, politicians desperately try to put up meaningful regulatory frameworks in an attempt to equip their respective economies for a more sustainable future. Especially, the European Union is the front runner in a lot of aspects and has currently the most comprehensive trans-national regulatory framework in the world.

However, just aiming for better environmental protection, less tax evasion, more transparency and a more inclusive and fair economic system is not going to be sufficient at this point anymore. As if the all that is not already enough work, there are also technical aspects to be taken care of. Over the last 50 years, states made use of the floating exchange rates and engaged in large-scale lending, which increased national debt considerably. Further, companies were able to develop new strategies to artificially raise the prices of their products and services; virtually, no product that we can buy is priced at the point that reflects its genuine value. Accordingly, the GDPs do not reflect the true economic output, but rather the artificial net worth of sales. Consequently, this means that the consumers, who overpay for the products and services they consume, alter their saving and investing behaviour, which impacts societal development as a whole. To simplify things, we can think about person A, who buys an iPhone for over 1000€, although it is produced for somewhat 100€ at maximum. If we add branding, lifestyle and overpayment of executives into the equation the real value of the product should be around 300-400€. By spending more than 500€ more for this products, person A has now 500€ less to spend on textbooks, seminars or guitar lessons. This example shows that the unregulated market does not only take away real purchasing power and value, but also counteracts societal development by incurring high opportunity costs. This is of course not sustainable and will lead to societal decay in the long-run. We can even describe this situation as decadence.

Most of us heard about bubble economies. Bubble economies are sectors or whole countries that are artificially priced over their true value. Once consumers, investors and issuer realise this, a big sell-off occurs and the sector, or the whole economy, collapses. This happened in 2007 with the North American housing market, which had global repercussions and ended in a global economic crisis. However, looking at the growth data, the regulatory frameworks, the price developments, consumer behaviour and stock market valuations, the global economy as a whole has become a bubble that does not reflect its true value. The current GDPs may reflect the prices, but not the values. Consequently, the global economic world needs a philosophical invention that enables us to structure economic conduct in a way that ensures reasonable growth for at least the next 200 years. Good news is that we know at least one constant of the equation, namely: the human nature.