Sunday, June 10, 2007

Go fishing

It's not unusual to hear people complain about the rising cost of living.

Our grandparents and parents have seen a rapid increase in the cost of living throughout their lives.

But that was just the beginning. They could never have anticipated what would come next.

What was affordable to our parents is unaffordable to many of us now: buying a house, driving a car, going on holiday, even buying a cup of coffee.

What some might consider fundamental to living a 'normal' life has now gone beyond the reach of the average person.

How it became this bad has already entered the mainstream media: developing countries such as China and India have been using natural resources so intensely that it has pushed up the price of everything that developed countries use every day.

What is not often discussed is what this 'new world' will mean for the lifestyle of millions, if not billions of people all over the developed (i.e. rich) world.

As I mentiond, a rise in the cost of living is nothing new.

The process of industrialisation and technological change has improved everyone's standard of living.

But this improvement has always come at a price.

After all, any rise in the cost of living is an inevitable by-product of an improving standard of living: we all need to want more to be willing to pay and hence justify its production.

This is simple supply and demand, as illustrated in my nifty little chart below:

The price of growth

What this chart shows is the rapid and increasing cost of living seen over the past 100 years or so.

Over that time, whenever there was an improvement in the standard of living and an accompanying rise in the cost of living, there was always an increase in demand (D,D',D''' etc.) to match the increase in supply (S, S', S'' etc.).

This process has accelerated in the past 10-20 years, especially with the rise of computer technology and globalisation. Note the chart does simplify a trend (after all, there could arguably have been a fall in the cost of living line over some periods, although the trend is certainly up), but it still manages to capture the current problem: a rise in the cost of living that has created a mis-match between supply and demand.

What this means is that the current increase in the supply of goods and services has not, and will continue to not be matched by an equivalent increase in demand. (Note: this is the case for developed countries)


So, what does all this mean?

In reality, quite a lot.

Firstly, substitution.

Instead of buying houses, people will rent. Instead of driving cars, people will use public transport. Instead of going to Starbucks, people will bring a flask to work or just drink water (from the tap!).

Secondly, people will change their lifestyles.

In the chart, any increase in demand that matches the increase in supply has an associated "sacrifice" that must be made.

Once people decide that the necessary sacrifice is not justified, or affordable, they will opt for a different way to use their free time and spare cash.

One option might be to go fishing.

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