Economically independent

Economically independent

Published on: 21 January 2021

A man who can do everything himself. Not the ideal image I expect to ever achieve. It’s a question of brothers who are handier. They were the ones who used to fix everything around the house. And so, they deprived me of the chance – I mean motivation, of course – to learn how to do things with my hands. These days, when a kitchen cupboard squeaks, I call a handyman.

 

This seems to go completely against the spirit of the times. Self-sufficiency is popular these days. Homeowners prefer to generate their own electricity, among young people there are those who want to arrange their own (early) retirement and many dream of their own vegetable garden. By going off the grid, you limit your dependence on others, is the underlying though. It also plays out on a national level: shouldn’t you be in charge of your own medicine and face mask? Let’s build up reserves so we won’t be at the mercy of the IMF.

 

It’s not just a romantic desire. There is an economic basis. Consumers value a cabinet they have screwed together themselves more than an off-the-shelf one (known in the literature as the IKEA effect). Doing it yourself feels good! It is also a logical reaction to the financial crisis, Euro crisis and corona crisis to want to build a buffer. That cuts down on dependence on others, right? 

 

There are some snags in this reasoning. Doing everything yourself is not efficient. If the handyman solves my problems and I solve his, we’ll probably be done twice as fast with a better result. In short, you get more out of your time if you use it efficiently. Another point is that building buffers seems to make you more resilient as a country or individual, but it creates new dependencies. 

 

Here's the thing. I can only save if someone else is willing to take on a debt. The same is true for countries. All global trade surpluses – let’s call it national savings - added together are by definition equal to all trade deficits. One country saves, another borrows. In short, it doesn’t mean that building buffers makes the system more stable. Not every country can be owner of securities. If the debtors collapse, so do the buffers. The “law of maintaining misery” is what my physics teacher used to call it.

 

It also shows that independence is an illusion. If I’m sitting on a big bag of saving, that actually makes me dependent on others. They will have to accept my money in exchange for goods or services in the future. Maybe they won’t. If everyone decides to retire at the same time so they can enjoy gardening, there will be no one to deliver meals or fix a kitchen door.

 

Now, in practice, of course, it will not turn out so extreme, but it indicates that in economics no man is an island either. Our wealth is based precisely on close cooperation with strangers. Perhaps capitalism has made us more individualistic, but certainly not more independent. In fact, the term “economic independence” is internally contradictory.

 

Of course, I’m not saying buffers are useless, just that you shouldn’t be blinded by them. Investing in social capital can also be very rewarding. And if worst comes to worst and you don’t have the money for a handyman, there might be a neighbor who’s willing to help. Or a handy brother, of course.

 

Charles Kalshoven is a senior strategist at APG