The idiosyncrasies of economics

We also like to argue that any new theory cannot be true. Take the latest book, Thomas Piketty’s Capital in the Twenty-First Century, which has become a publishing sensation. Its main message is that rising inequality is killing capitalism. This is like spitting in the eye of most pro-capital, pro-equal opportunity right of centre economists.

The arguments for and against are fierce. The gist of the book is that returns to capital are rising faster than economies are growing. The wealth distribution is becoming more skewed. Inequality will widen to the point where it becomes unsustainable. The rich are few, the consumers who are mostly impacted are many. This suggests some major factorial changes looking forward.

This leads us back to global trade and trying to work out how to reconcile economic indicators such as gross domestic product with consumption. In Europe everyone has become excited by a GDP increase of 0.8% in the second quarter in the UK, which after more than five years has finally brought us back to where we were before the Great Recession. But I’m not sure this is that much to shout about. The figure itself is small, especially when compared with the US where the same quarter had a 4% rate of growth.

In Europe, industrial production tends to track GDP whereas in the US it plays a much smaller role as consumption accounts for 70% of GDP. As a result we are also seeing higher trade volumes North America than in Europe.

The conclusion that we can draw from all of this is that we should not get too excited about trade growth over the coming 12-18 months in Europe and that we are not out of the quagmire just yet. The other conclusion is that the majority of us will continue to see downward pressure on our disposable incomes. Now that’s really nothing to shout about.