Crazy Economist #1: Long term life cycle of Economy
During my undergraduate study at University of Indonesia, Depok; I was taught by Mr. S basic economic 101. It’s a basic stuff, but it helps me to understand the world a bit better for sure.
First time read the book of Introduction of Economics, the language are quite normative and where ever you look, you have to make sure you’ll find the charts so you won’t get sleepy.
And this is the charts that I remember until today:
Long term Economies of Scale life-cycle chart
It’s a simple chart that depicts how economic works through out history. So if @Ray Dalio puts it on Youtube as “Changing World Order” https://www.youtube.com/watch?v=xguam0TKMw8 (I would strongly recommend you to watch it); I would like to share my thoughts on the economic chart side of it.
Economics move through Supply vs Demand forces. Whenever there’s Supply, there shall be Demand (no Supply exists in long run without Demand).
Through out the time, the Supply changes due to several factors: Technological advancement, Cultural preferences, Believes, Political Landscape, etc.
Example: If a factory increase its producing capacity, then its economies of scale increases should they're able to produce more with less resources added (increase in profit/unit)
Decrease in economies of scale incurred if they increase their factory producing capacity, but can't receive more profit/unit as the demand grows.
These changes in Supply are also determined by the Demand changes:
Latest trend, latest need on lifestyle/technology, marginal of utility or satisfaction/benefit vs cost preferences.
Different economic classes ask for different type of preferences. This is where marketing works. I shall not go in depth on marketing side of this chart (that’s not my core here).
The thing that interests me the most is this:
Whenever there’s historical turmoil there’s always Economic reason behind it and the curve shall shift to increase/decrease the demand; or change into a different demand type (i.e substitute product).
Let’s put it on a checklist here (you can add more if you like):
a. French Revolution 1789-1799? : https://en.wikipedia.org/wiki/French_Revolution
When “borjouis” / monarchy enjoy abundance despite majority of population is in hunger, poverty and live a life as if they were criminals to meet their ends need.
This is the time when I see whenever there’s a social economic gap, there shall be no sustainability/security.
b. VOC / Netherland rises through out the world: https://en.wikipedia.org/wiki/Dutch_East_India_Company
VOC as a Netherland Company manages to conquer most countries in different continents by trading each country specific goods (i.e Indonesia has its own unique spices for health/cold prevention purposes). But it gets too big as a Company, even an autonomy through each local municipalities general can’t satisfy the local needs / life improvements.
c. World War 1: https://en.wikipedia.org/wiki/World_War_I
This happens when there’s rapid technological advancement, but limited resources resulting a war to acquire the advancement. Limited resources to advancement/ improvement in well being is the issue that I’d like to depict on why it may trigger war.
d. Boston Tea Party: https://en.wikipedia.org/wiki/Boston_Tea_Party
This is when America was given great autonomy by British; but felt pressured when they have to pay taxes to British counterpart, as they seek to understand the benefit of paying those taxes.
From these historical events, it shows how social behaviour reacts on Economic pressure:
1. No improvement in quality of life = changes in Demand and Political preferences
Thus the charts Supply and Demand shifted overtime to meet those Demand (to the right if the Demand is increased).
And time and time again it shows, that those Demand -> improvement in quality of life; shape history and Economic preferences.
2. Whenever there’s technological advancement, there shall be changes in Demand.
3. Whenever there’s a social economic gap, there shall be changes in Demand - arbitrary rule
I remember that chart well because it shows:
A) Money can help you to create Supply and Demand, but it doesn’t necessarily improve the quality of life if we were to invest it on the same benefit / marginal utility time after time.
This means, money should be the result of our goals, not our sole purpose of economic activities.
Why?
It shall bored us when we eat a lot of ice cream time and time again due to unlimited money that we have.
It’s the same reason why you change your preferences overtime (not your spouse); and willng to pay more for it (again, not your spouse please; i know he/she is old, but come on, you know him/her well than any other new person next to you).
So it’s not sustainable in the long run to expect money saves you. Nope, it’s the other way around. Your preferences in using your money are the ones that will save you.
B) Quality of LIfe or Increase in Marginal utility is the driver of the long term economic life cycle sustainability.
No one is willing to purchase the latest phone with the same features. They’d like to try the Artificial Intelligence (A.I) features, camera features, etc.
Demand shall increase when they felt their life was being fulfilled by having that phone. Thus that’s why they purchased it.
Marginal of Utility:
Satisfaction shall diminish whenever there’s too much the same thing consumed/purchased repetitively.
Example: first ice cream feels great; but when you eat it every hour, you shall loath it over time.
PS: If your spouse bores you to death, just remember maybe no one else would be willing to stay if you're sick/unwell. So marginal of utility must be found in other things rather than changing that person. (IMHO)
C) Renewable resources/Sustainability is the long term fuel the increase in Economic capacity/shifts.
If we were to create Demand for things that are not sustainable, we’d expect the Supply shall drop over time. It may create chaos when the Demand persist towards that specific product Supply; but at the same time scarcity demands antiquity.
So based on that chart, it shall be challenging to invest on things that are not renewable, because we can’t increase its capacity or economic span of life in the long run. However, we can nourish its antiquity by keeping it unique and scarce.
This means, unrenewable resources can’t create greater economic capacity/ life span; but it can create scarcity/ significant increase per unit price.
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In the long run, it shall have limited traction as the Demand still persist and seeks substitute that they can actually change their preferences to.
OR maybe sometime in the future we can have a biological organism that can speed up producing oil -> Technological advancement plays a key role in this.
Real Life example:
Telecommunication Business
People used to be happy to be able to use phone to call someone.
So they put phones everywhere: home, office, public places, and rural places on earth just to reach people back -> Fixed line phone to communicate at fixed premises
Next, we can carry our phones whenever wherever so people can reach us, despite the 3 kilograms weight and lengthy antenna to reach a good signal -> Satelite Phones
Few years added, we have hand held phones/ handphones that has specifically done its job well: texting and calling people. -> Handphone
Few years added, we try to use our phones to reach other random people too, through social media/ instagram/ tiktok/ games-> Handphones as Personal Public Relation/Image builder/ Games to show our finger/ strategic skills -> Smartphone
So there’s a change in product preferences, but there’s basic needs from it: Communication; not the phone.
Please do count how many Companies work on that story above?
From the telecommunication business life cycle, we learn that long term economies of scale is not about the product / phones. It's about the way you communicate with others, how you feel engage, accepted, liked and approved through social medias or maybe other medias in the future.
So if we were to expect long term sustainable product demand; we must first seek to meet our basic needs and match it with renewable resources and sustainablity in producing it in the long run.
(I hope this should be your AHA moments)
Because people basically just want the same thing:
Happiness, safety, advancement, latest trend, acknowledgement, social position, all the good things in life.
But sometimes, we try to achieve it in all the wrong ways/bad things, just to get it.
But in the end what we want is the same thing all over: time after time, and after time: good things.
Now, I know it feels like so normative; but the changing of preferences/ world order / just a basic change; simply is trying to address the same issue:
Demand - always value good things:
Will it increase my well-being? Will it be satisfying / useful for me to purchase/use it in the long run?
Me = Us, because we wont be safe walk in 2 karats of diamond when no one else around have that capacity to buy that diamond. (Ubuntu principles)
And to meet those Demand, we must make sure it’s safe/sustainable to minimize the historical turmoil presented above.
I understand that some people like Indiana Jones when he strives to achieve his goals. But you see, what he pursues is a specific, unique, valuable things. Not basic needs.
Economics address demand as a whole community, not a specific goals from each individual. (My point is, no one wants to be "everytime in action kind of Indiana Jones" to achieve what they need).
Grace Consult Group seek to prevent the abrupt changes in Economic landscape. Join our Community and let’s seek to create a cushion on political turmoil/ technological advancement by creating a safe place where we can prevent hunger, poverty, homeless and loneliness (when we’re retired) globally, together.
Seek to invest in the long run for our quality of life. It’s your own savings/ trust funds, but with the same purpose to prevent the effect of changing environment (A.I advancement, geopolitical tension, political preferences, etc).
Visit our website for more information and fill out the form to show you are interested:
Please note:
This article purpose is never intended to make business suffer/government discontent. This article was meant to help all stakeholders to actually contribute and provide solution towards it, please don't spin things out just to make things unresolved. Use your social media for the benefits of all. As we need urgent solution for these problems (added with climate change):
These are the signals on why I think we must act immediately, globally, together:
Allianz report:
Worldbank data to support country by country risks:
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