Miodrag Šajatović: The Revenge of the Invisible Hand

What life is. You start writing about economics in youth newspapers as an economics student in 1981, and your main topics, in the then socialism, inflation and shortages of goods. You write, you write… forty years later, in 2021, you find that the main economic topics again are, this time in capitalism, inflation and shortages.

If global pressures on price increases and shortages of raw materials, parts, and even final products persist, one of the simple explanations for the differences between socialism and capitalism no longer holds. According to which, in socialism, a person had money, but there was nothing to buy with it, while in capitalism, there are goods, but many do not have the money to buy them. Because, here we are in the third decade of the 21st century, there is money in various channels to throw away, but it is increasingly difficult to obtain products.

If I stop – I fall

The awakening of inflation and, as it is euphemistically said, disruptions in supply chains, are not just the consequence of the coronavirus pandemic. The causes are deeper and have escalated due to unprecedented money printing and increasing debts in the world after the financial crisis of 2008. The fact that global imbalances have now surfaced is the revenge of the famous ‘invisible hand’ that Adam Smith presented as a metaphor in ‘The Wealth of Nations’ in 1776.

It is sensitive to mention the ‘invisible hand‘ of the market because it is the central deity of liberal and neoliberal economists, who would leave everything to the market. And it opens an endless debate. Like whether or not to get vaccinated. The debate about the relationship of state mitigation of some raw consequences of the ‘invisible hand’ has lasted a whole century. For this occasion, just an acknowledgment that when attempts to suppress basic economic, market (let’s say natural) laws are excessive, then the ‘invisible hand’ strikes back.

This is exactly what is happening. It has been a quarter of a century since Miroslav Kutle famously said: ‘If I stop – I fall.’ So today, central bankers around the world, from the American FED to the European Central Bank, are prisoners of a decade-long practice of postponing recession. By pumping abnormal amounts of billions of dollars or euros created out of nothing. Only the naive believe that central bankers will dare to raise interest rates that would trigger the collapse of the global house of cards. U.S. Treasury Secretary Janet Yellen claims: ‘We do not need to worry about debt.’

However, the ‘invisible hand’ has become angry and sends warnings. Production cannot increase at the pace dictated by money-printed inflated demand. An unlimited amount of raw materials cannot be exhausted in a short time.

Is China copying Croatia?

It is a common place that shortages of many final products are a result of parts from China not arriving due to a lack of transport ships. This seems to be only part of the truth when it comes to China. A rather unnoticed indication from the last annual session of the Communist Party of China has passed that maximizing exports will no longer be a priority of state economic policy. That there will be more focus on production to satisfy the domestic market and stimulate personal consumption.

One could, with a bit of malice, note that the Communist Party of China is copying Croatian economic policy makers, for whom personal consumption is also more important than exports. The only difference is that the Croatian internal market has four million consumers, while China has more than 1.4 billion buyers… If we return to the possible turn of Chinese economic policy, a shadow falls on the bait that all of us easily accepted that unpleasant experiences from the pandemic are a good opportunity to shorten supply chains in Europe, to produce in the EU what was imported from China. Which is easier said than done, especially in the short term. This concept is already mockingly referred to as ‘the balkanization of global supply chains’ (Roubini).

All in all, ‘the pitcher goes to the well until it breaks.’ There remains a faint hope that the ‘Minsky moment’ (a sudden loss of confidence in the global financial debt scheme) will not happen for a long time.

Countries like Croatia cannot influence the decisions of global power centers. But small countries need to prepare for the moment when the revenge of the invisible hand will come. When it gets tough, the most important thing will be what a country can offer in exchange for goods that its population needs in times of crisis. If, for example, wages in the EU dramatically fall, savings collapse, and debts come due, it is hard to believe that frightened and impoverished citizens will rush to the Adriatic for their annual vacation as they did this year. Agricultural and food products, parts for plants, and other industrial products would be more desirable for barter than ten days of stay in an apartment on the Adriatic. 

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