Libraries are wonderful places.
They have shelves and shelves of knowledge and tales.
To boot, they’re full of books you’ll never own.
Yet, you can pick them up, sit down, and read a few pages…and still learn something or have a laugh along the way.
And it was at my local library a couple of weekends back I picked up a booked called The Second Rush.
I’m only halfway through, but it’s a fascinating take on the half-century commodities boom Australia most recently experienced.
Now most Aussies seem to think of what happened this century as the ‘commodities boom’. Really what we saw in those years, was a commodities super cycle.
Nonetheless, one thing the book does point out at the start, is Australia has really had two commodities booms.
The first was the gold rush that started in the 1850s, and petered out by the early 1900s.
The second kicked off in the 1950s when we started selling coal to Japan.
For now we are seeing signs that perhaps this massive 50-year commodities cycle is over.
So what happens when Australia’s days of being the world’s quarry are over?
Well, it isn’t all bad news.
You just need to know how ‘capital’ flows through the market…
Understanding money flows
Long-time readers of The Daily Reckoning Australia know I am anticipating a recession.
Why? Because I understand the role consumption plays in our economy.
To put it another way, I’m well aware of my role as a consumer rather than a producer.
At the end of the day, there’s more people like me in Australia than, say, dairy farmers and wheat growers.
But there’s a little more to it than that.
Many years ago, I stumbled across the research of a 1980s demographer called David Harvey.
His theory on the three circuits of capitalism transformed my understanding of how our economy works.
It also helped me to understand that while a recession may come, it won’t be the end of our economy — just a transition to the next phase…
Three circuits of capital
In a paper titled ‘The Urbanization of Capital’, David Harvey analyses how capital flows through an economy.
According to Harvey, there are three circuits in a capitalist society. The primary circuit, the secondary circuit, and the tertiary circuit.
The primary circuit is an economy in the production phase — the ability of a country to produce goods.
In Australia’s case, that was our most recent mining boom. Our spare capacity in both the labour market and available minerals let us exploit the two for a profit to grow the economy.
Or, in simple terms, we had the rocks to sell, the people available, and demanding customers.
For a decade, it worked.
The mining boom provided incredible amounts of growth for the Aussie economy. We dodged the financial crisis because we were able to supply goods to another party.
But according to Harvey’s analysis, too much ‘success’ in the primary circuit results in over accumulation.
This is something Aussies witnessed firsthand.
Again, in the case of our mining boom, we were supplying far more commodities than the global market demand.
In the case of China, for example, we supplied more iron ore than China wanted. This saw prices fall and company profits shrink.
In turn, firms reduced staff numbers and scaled back production. This led to higher rates of unemployment, while investors moved elsewhere in search of returns.
As a result, mining town populations dwindled — as did the high-paying jobs. Once the primary circuit ends, the capital flows into the secondary circuit, says Harvey.
This is where an economy shifts from producer to consumer.
Stuck in the consumerist phase
The secondary circuit is very much about money flowing into fixed investments that relate to building and consumption.
That’s all your houses, shopping centres, and leisure activities. On an individual consumer level, it’s money spent on swimming pools, nights out at the movies, dining out, and even new cars.
Throw in some loose credit policies, and before you know it people are buying $200 toasters and overpriced coffee table books.
This phase is often referred to as the ‘built environment’ and the ‘built environment for consumption’.
Essentially, the economy becomes focused on what it can build, rather than what it can produce.
Just like the primary circuit, there can be excess supply in the secondary circuit. Basically, that point comes when we build much, much more than people want to buy.
Harvey’s argument is that once an economy becomes focused on building for growth, the whole system starts to look shaky.
Harvey also points out that too much credit amplifies these circuits. And that if any of the circuits are propped up with debt for too long, they create unsustainable bubbles, which have severe ramifications for the economy in question.
And that’s where Australia finds itself today.
So, what comes next as the Aussie economy slowly unravels?
Brains over brawn
Australia is yet to transition from the secondary circuit.
Our economy is still very much hitched to building apartments, roads, and bridges.
And judging by the $80 billion in federal infrastructure projects underway, we still have another half-decade for this to play out.
But as a country, we still have one more ‘circuit’ to transition to.
Harvey’s research suggests that following a construction boom, money moves into a sector that benefits society much more in the long run.
That is the tertiary sector.
It’s where we invest in science, technology, and other products that have social value.
According to Harvey’s theory, excess supply in construction leads people to invest in science and technology. He also points out that the secondary circuit — that is, using construction as a driver of economic growth — generally results in some form of a crisis.
If there’s no money to be made in production or construction, life-saving medical investments will attract early investors.
This has a twofold effect.
The economy benefits from new jobs, created in new fields of science and high-tech methods of production.
This results in societal benefits, which improve the human condition.
Once gains from the secondary circuit start to decrease, money moves into the tertiary circuit.
Essentially, this final stage is an investment in society.
It’s the part of a capitalist society where lower economic growth is sacrificed for overall population health.
Think of it more as an investment in society overall.
Money flows into science and technology, ideally creating a healthier population. And innovators look for more efficient methods of production and building.
Allowing commodity prices to fall, may mean the Aussie economy is ready to mature.
When it does, know that we aren’t too far away from a brighter future.
Until next time,
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