For nice reasons, I have been away from the site for a short period. In that time, I have received many positive responses to my blogs – for which, many thanks. It’s great to know people are finding my comments useful and interesting. I will get round to replying individually where necessarily, in due course.
Meanwhile, recent experiences have reminded me very strongly of one proverb that sits well with the modern economics situation – don’t put all your eggs in one basket. I will use a pastoralist economy to develop my theme.
Pastoralism depends on the availability of pasture to sustain your animals at all times. This may imply nomadic wandering with the seasons/rainfall pattern or some other system of rotational land tenure which tends to treat the inputs (grass) as a free, though degradable, resource for all. The problem is ‘free goods’ tend to be over-exploited and are vulnerable to shocks – adverse weather, excess population, over use of land, and/or some sort of new land access restriction (ownership/division/politics) that interferes with the established nomadic process.
In this economy, animals are wealth – an asset that retains value (as long as it retains quality). They are a form of money: a store of value (I have 5 cows in the ‘bank’), a unit of account (my labour is worth 2 cows per annum – your corn is worth 0.25 of a cow) and a medium of exchange (I will trade you one cow for your help in building my home).
But, animals are also capital stock – they are a tool that can be used to generate future income from production over different time periods. In normal times and any market, capital depreciates and needs to be replaced. If a living animal is your capital, that means reproduction of new capital, which is equivalent to “saving” and “investment” for the future (saving “for a dry day”). A bad drought affects the ability to maintain capital and owners are doubly vulnerable if the capital has been used as security for a loan. Usually, you don’t sacrifice your capital unless you are really desperate. Hence, pastoralists tend to hold on to livestock as long as possible. But, this may ultimately prove futile: when a line of business stops generating useful surpluses, capital can itself become worthless.
Finally, the animals are also a flow of current income – they generate milk, meat etc and can be sold for money or bartered for other products. So, through the health of the animals, drought-led loss of pasture not only degrades capital but it also degrades income: the whole economic chain collapses.
When the ‘business’ is losing capital and income, it is important to act early to avoid the point of no return: insolvency and famine. So, in theory, liquidate your capital at the optimal time and re-invest the proceeds in alternative income generating capital – which can include human capital. The problem with pastoralists is that their skill base is specialised in one area and it is not easy to switch (if only for cultural reasons) when shocks occur. They need help to create different “baskets” of skills where wealth, capital and income are not all the same thing!
To make matters worse, the pastoralists are all in the same line of business: when one fails, they all fail because they are reliant on one income stream, one form of capital and one form of wealth. The best insurance for their community is to have other skills and income streams to fall back on. Even as they maintain pastoralism, some of them have to do other things to create alternative value: in good times, diversify and co-operate for the bad times.
Individual specialism is a good thing in most parts of the economy because it allows greater productivity and exchange which tends to raise living standards over time. But, it requires two things – that your specialism is valued – (there is a market to sell into) and your specialism is sustainable. So, we can have specialist doctors because we all value their work and are willing to pay for them (in cash or taxes) and it is sustainable because illness is endemic. However, even here, the specialism in demand can change – a cancer that used to be treated by surgery may now be treated by drugs = fewer surgeons and more medics.
The trouble for pastoralists is the value of their activity is largely for themselves (with little external trade) and it’s not sustainable if adverse climate and/or over-exploitation of the basic resource occurs. A sound economy cannot mean that we all specialise in the same thing. It needs a mix of activities. Subsistence economies are always vulnerable but a modern economy can be just as vulnerable if its foundations of assets and incomes are concentrated – ask the Greeks what happens when a financial ‘drought’ hits.
No matter how complex/inter-linked the global economy looks, there are still areas of over-dependence, over-specialisation and over-concentration in products, services or markets. Don’t put all your eggs in one basket is as true for bankers as it is for pastoralists.