Friday, July 10, 2009

Reckoning A Living Wage

The last few posts of this blog have covered the key role of local businesses and local economies in promoting neighborhoods and communities that are resilient in the face of Peak Oil, climate change and economic collapse. Local businesses that have the greatest chance of early success will be those that make or repair necessary or highly beneficial material goods, or that provide essential or highly beneficial services, for market niches that cannot be easily serviced by the global “official” economy due to incompatibilities of scale. By incompatibilities of scale I mean that these market sectors are small enough and/or scattered enough that they can't be served by the mass-produced, mega-chain store approach that is typical of large-scale businesses. Of course, as economic contraction and collapse proceeds, an ever-expanding number of markets and people will be abandoned by the official economy, leaving more room for the rise of local businesses and local economies.

One key question for someone seeking to start his own local business is how much to charge for goods produced or services rendered. A big part of this question is for the prospective small businessman to figure out how much income he needs to live on, and this in turn is influenced by the state of the prospective market – that is, how much the businessman's customers are willing and able to pay for the goods and services rendered. The calculation of the businessman's required income can be stated another way: he must calculate what constitutes a living wage for himself and his dependants and employees.

The calculation of a living wage can be influenced by any number of factors. Many people start with a picture of a desired lifestyle, and by means of simple mental arithmetic they come up with the income required for that desired lifestyle. Our uniquely American problem is that almost everyone who watches TV (and a sizable number of people who don't) has been trained to imagine a very lavish lifestyle, and to want an income to match. Most of the celebrities and influential figures in our country are afflicted with this disease, and they will resort to desperate measures when their income doesn't match their desired lifestyle. Names like Donald Trump, Bernie Madoff, and Kim Basinger come to mind.

This diseased state of mind isn't confined to the rich and famous, as events of the last few years have shown how many Americans lived far beyond their means. And this mindset is a hindrance to the correct process of reckoning a living wage. The correct process begins, not by formulating a picture of a desired lifestyle, but by figuring out how much customers are willing and able to pay for the goods and services offered by a prospective local business. If a woman opens a shoe repair shop in a rural town in Kentucky, and hopes to have ten customers a day and gross $50 for each repair job, she's likely to be disappointed if the town's residents are so poor that they can only afford $5 or $10.

I'd like to suggest that those Americans who want to start local businesses should reckon their figure for a living wage downward, because the ability of most people to pay for goods and services is decreasing. This is due to three factors:

  1. First, the global economy (and the large-scale American economy) is now contracting, due to constraints in the availability of natural resources necessary to supply the economy. It is becoming more evident that the world has passed the peak in global oil production, and that oil production is now beginning to fall. We have already seen peaks in other resources including metals and rare-earth elements. Peak coal is not far away. The availability of fresh water is also declining, due to overuse of rivers and drought-induced climate change. Some analysts say that the world experienced Peak Phosphorus (especially inorganic phosphates) in the 1980's. (Source: Phosphorus is a key ingredient of agricultural fertilizers. Resource constraints and exhaustion mean a shrinking economy, and a shrinking economy means less income for each member of that economy.

  2. Second, the concentrated wealth of the United States, as well as the lavishness of the American lifestyle, have been built on a foundation of military conquests, trade agreements and treaties that facilitated the concentration of the world's wealth in this country, and in the hands of the ruling elites of this country. Thus, for instance, the U.S. has only five percent of the world's population, yet uses over 40 percent of the world's oil. Now those complex arrangements of military might and slanted treaties are starting to unravel. Net oil imports to the U.S. have been declining for the last few years as oil rich nations have become wealthier and have begun to use more of their own oil. Foreign nations are becoming much less willing to buy U.S. debt, and are turning away from the U.S. dollar as the world's reserve currency, due in part to the huge debts for which the U.S. government is already liable.

  3. The collapse of credit worldwide which precipitated our present economic crisis has also resulted in the loss of access to credit for ordinary people, who are now forced to live within their means. The means of ordinary people are shrinking as companies, stung by failing revenues and their own lack of access to credit, lay off ever larger numbers of employees. The increasing layoffs and downward pressure on living standards are the evidence of a shrinking global economy and shrinking American access to the goods and services provided by that global economy.

A word about point #2 above is in order. Some analysts and “collapse thinkers” have voiced the possibility of a sudden, near-term collapse of the arrangements which underlie the American lifestyle – perhaps through a massive sell-off of foreign-held U.S. debt, or a Federal default on U.S. debt, or a sudden crash in oil production or oil exports. If that happens, there will be a swift and sudden decline in the standard of living of most Americans, since we depend on imported goods for so many things. To cite just one example of the scale of this decline, consider what would happen if the American five percent of the world's population that now uses 40 percent of the world's oil woke up one day to find that they now had access to only five percent of the world's oil. On a per capita basis, this would be roughly equivalent to each American finding out that his or her income had suddenly been cut to one-eighth its former value.

Now a per capita estimate of the effects of such a collapse is necessarily flawed, as wealth is not equally distributed in this country. Nor is access to wealth. In the event of such a crisis, it follows that some people would hardly be affected, while a large number of people would be thrown into grinding poverty. Yet it seems quite likely that whether this happens suddenly or gradually, our nation is moving toward a condition in which we have access only to our fair share of the world's resource base – and that the non-renewable part of that base will be continually shrinking. Under these conditions, the sort of small businesses that survive will be those whose proprietors offer necessary goods and services at an affordable price, and who are able to stay in business because they have scaled their own needs back to a level that's sustainable over the long haul.

Here then are some good questions: Could you live on an income that's one-eighth or less of your present income? If not, what steps could you take to simplify your life so that you could live on a drastically reduced income? How much can the citizens of your locality actually afford for the goods and services you propose to sell them? Are these goods and services really so essential or beneficial that people are likely to buy them?

1 comment:

ha1ku said...

I have been thinking about these very questions since $4 a gallon ...tinkering with my budget and identifying nice-to-have from must-have. It's scary.