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The economy as a living thing

Apr 30,2018
Kim Hyoung-tae
*The author, former chairman of the Korea Capital Market Institute, is a guest professor at the Seoul National University Business School.

A person with iron deficiency cannot consume metal powder to make up for the lack thereof. The iron that the human body needs for nutritional intake is a ferrous chemical compound, not the ferrous metal from a furnace.

Now for a trickier question: Can consuming collagen really help slow aging of the skin? The answer is no. The human body cannot absorb proteins in their natural state. Certain enzymes in the stomach and pancreas break the bonds that hold together amino acids in proteins to help the body absorb the composite acids individually.

So it is wrong to simply think that protein-rich foods can get absorbed into the body, build muscles and tissue and make the body stronger. Our body is a living organism. A living organism, whether it is the body or the economy, is not so simple as to be explained with such clear-cut suppositions.

Imagine a protein composition with the phrase “I love you” enters the body. The phrase gets absorbed as individual components: “I,” “love” and “you.” Once in the body, they do not go back to their original state. The components seep into the blood and spread out to many parts of the body to combine with other amino acids in the body.

This is the magical part of life. If another composite phrase “You hate me” enters the body, it would also broken down into three components: “you,” “hate” and me.” The intake of a collagen compound structured with “I love you” can, in fact, end up entirely as the opposite: “I hate you.” Therefore, a certain protein supplement you consume may not necessarily play the function you wanted.

An economy is no different. A living economy is very complicated. Just as an iron deficiency cannot be fixed with metal powder, an economy does not get richer purely through an abundance of liquidity. Thinking the economy can get better by increasing money supply is like wishing the body will become stronger through the intake of ferrous powder.

Aggressive fiscal spending also does not necessarily get absorbed and play a nutritious role in strengthening the economy. To be effective, it must fragmentize and be channeled into weak areas. Otherwise, it will go to waste.

Will consumption pick up if wages go up and household income improves? That is not necessarily so. Even with greater liquidity in the market, people will only spend if their disposable wealth increases. Money will still be tight if the increased income goes toward paying taxes, medical bills, pensions, mortgages, student loans and phone bills. If money is not left after paying all the fixed expenditures, people won’t spend even with better income and business.

Purchasing power is further watered down when inflation — the invisible tax — plays a part. And when the increased income goes toward paying off debt, it is the integrity of the banks that will improve, not the overall economy.

Even if a solution is ingested, it can join with other components to create undesirable results. Money, for instance, can end up in savings instead of being spent in the economy. The phenomenon grows when the income gap widens. The domestic economy can only improve if spending takes place at home instead of overseas or on imported goods and services.

To solve the problem, perceptions of the economy and policy-making must change. Households and businesses are not machines that act upon command. They must be regarded as thinking, reactive and evolving organisms.

Digestion is the process of breaking down insoluble food molecules into water-soluble matter small enough to be absorbed into plasma and seep through the small intestines into the bloodstream. In similar fashion, the market acts as the enzyme that breaks down nutrients. Indigestible economic polices can become waste.

Water does not need to be digested. It can be imbibed without chemical processes. Monetary policies require a chemical action, while fiscal policies, like water, can be immediately digested.

A minimum wage increase or basic pay raise brings money to households without a complex process later. We can survive on water for several days, but we cannot continue living purely on water forever. The effect can be direct and more specific, but fiscal policies increase the burden on the public sector. It must be accompanied by good monetary policy. But the desired effect can only come out in a working market because it is the market that absorbs and digests any new entries.

Like the human body, the economy must be able to run around the market to help digestion and facilitate a healthy intake. The market therefore should come first in all economic policies. If the market is not respected, policies could end up going down the toilet.

Translation by the Korea JoongAng Daily staff.

JoongAng Sunday, April 28-29, Page 35