Why investment in luxurious market is the way to go?
Those involved in business world know these days that the world is experiencing a slowing economy. This means, the general tendency of economic trends is toward efficiency, frugality, and cutting unnecessary costs in all aspects of life and business. Therefore, investment in extravagant goods, services, and assets appears to be illogical and leading to pure losses.
But is that really the case?!
Economy is akin a living system. It's animated through dialectics of two opposing force:
These two forces act in reverse of one another. Efficiency means doing more with less resources. Whereas economic rent means appropriating more resources by doing less.
A classic example for efficiency is when a company maintains the same output while laying off redundant employees. Such a company is increasing its efficiency. Because it's now accomplishing the same job with a smaller labour-force.
Contrariwise, a classic example for economic rent is a company that maintains monopoly over a market, and thus, is able to rake off excess profits with less output. Such a company is even able to further augment its market yield by simply pushing supply to go lower than demand. This tactic is commonly exercised by both Cartels or Trusts who decide to lower their output to push market prices higher, as well as labour unions who organize strikes to force employers into agreements on higher wages. In either case, monopoly, or any other form of economic rent for that matter, acts in contrast and against economic efficiency.
It happens to be a consensus amongst economists to assume the general tendency of capitalistic market economy is toward increasing efficiency, and thus, eliminating economic rent.
Yet, even early pioneers in the field recognized the model's unsustainability and identified a missing element crucial to its success!
One notable name is Thomas Malthus, who realized if both capitalists and workers are supposed to lower their consumption to maximize production output, then who is supposed to be the consumer of that surplus?!
Malthus came up with a resolution for that contradiction, which some others deemed as a childish inference from his serious observations!
His idea was that the noble class of aristocrats is burdened to keep the economy going, through maintenance of an increasingly higher level of consumption.
This state of affairs, as envisaged by Malthus, is indeed absurd and farcical. Nonetheless, there's a crucial element of truth in it, wherefrom we can understand the actual dynamics of today's economic system, and for discovery of which, Malthus is entitled a portion of the credit too.
Economic surplus exists in all economic systems. There is no question about that, and there's no way to eliminate it. The more an economy becomes efficient, the bigger and larger its economic surplus gets too.
The only question is, how is this economic surplus absorbed? Where does it go? To whom it would flow?
Recommended by LinkedIn
Flow of a portion of economic surplus, by definition, is none other than what was classically already known as economic rent. Therefore, whoever enjoys being a receiver of economic surplus, is instantly subscribed under the club of rentier classes.
Of course, modern rentier classes are quite different from the classic peerages. In fact, it seems offsprings of the wealthy are more than ever likely to lose what their parents diligently had toiled to earn! That's aside from the other fact that these days there are many who wittingly or unwittingly decide to end their pedigree with themselves and leave all their wealth and throne without any heir.
Nevertheless, these minutiae are irrelevant to the core point. Today, as in any other historic age, there are and must be those who enjoy receiving economic rent. Their existence is as crucial as ever, for the simple fact known by any businessman, that without customers willing to pay and buy goods and services, there will be no sales and income.
Now we've established that some people must always earn more than what they actually contribute, so the economic surplus is absorbed and businesses can continue to thrive.
The question arising immediately after, is why then are we seeing phases of booming and slowing business cycles?
The answer to that comes from the fact that economic efficiency and economic rent are incoherent in their nature and substance. Efficiency is a pure economic phenomenon. Whereas rent is also a political concept.
These two act in opposite directions. Over time, efficiency leads to higher economic surplus. Whilst rent acts as a drag force against growth of economic surplus.
At times when economic surplus is too strained by rent-seeking agents, economic exigency then forces the social and political system to push for increasing economic efficiency, which necessarily means eliminating some economic rents. That's when you see companies laying off their workers, and business conditions getting slack and depressed.
Conversely, with improvement of economic efficiency, the economic surplus grows to a point where the system is forced to relax austerity measures and allow rent to flow in higher magnitudes. That's when you see all businesses thriving and everyone scrambling to hire more and expand their workforce.
The problem with this cycle is the social friction emanating from the fact that, from a social and political point of view, economic rent is extremely addictive.
Forces of efficiency are often resisted by rent-seeking social movements, who insist upon receiving the same level of rent they are wonted to get, despite shrinkage of the surplus available to the entire society. In some societies the forces of efficiency prevail quickly, whilst in some other societies this struggle could turn into a perennial clash of interests. The French and Greek are quite familiar with such clashes. In such cases, economic booms are forced without increasing efficiency, which leads to complications in many ways, but nonetheless allows the economic life to continue.
However, in a global context, the cycle is discernible in the cleanest and most predictable manner. Every downturn means a rise of efficiency, and therefore an increase of global economic output. And that surplus then flows to the opulent of the world, trickling down to others thereafter, the result of which is the next economic boom, ad-inifinitum.
Whilst today the global economy is bogged by tightening of monetary and budgetary policies, this is a sign that the next booming phase is on the horizon. Aiming for low-income markets might appear as a logical decision for the short-sighted, but it's a strategy for failure once the tide turns.
Most economists only see the economic tendency toward efficiency. They abstract away from political context, which is why they get blinded about the opposite tendency for increasing flow of rentier income.
Furthermore, from a global point of view, there is a division of responsibilities between different regions of the world. There are those who are tasked with industrial production, those who are tasked with financial management, those who are tasked with replenishing the labour-force, and those who are tasked with extravagant and luxury consumption. I'm leaving it to the reader to decide what would be task of their region when looked at through this lens.