Only naive people think, that those who wish to improve living conditions today raise prices for habitation. But for that, rapid growth of demand and, accordingly, of the prices is caused by that factor, that the real estate market became an appendix part for the investment fund, on the one hand, and the tool of income savings, on the other.
In its turn, the rapid development at the real estate market proves, that the country has no powerful innovative processes. If they were, they would absorb invested capitals with the exceeding profit. They would also supply the investor with alternative investments, and they would allow hoping for growth in future. When there are no innovative fields in economy, to pass the capitals into any other field means to increase risks for all participants. The final wave of "active workers" like in a financial pyramid pays for incomes of all the previous. This is a principle of "a soap bubble".
Commentary
1.
We still reap the fruits of Bolshevik ideology. It has had a crushing blow for market mentality and for a business behavior. The marginalizm is the basis of the marketing nature. I may argue that not all politics, officials and even businessmen heard this "strange" word ("marginalizm"). And according to laws of marginalizm, each new unit of the capital added to the traditional capital, reduces the productivity of the previous.
This circumstance of reduction not of every, but… of each subsequent unit of the traditional capital is the reason for seeming growth. But actually it is the decline of capital in free economic zones, fields of priority development, techno parks, etc. (The total accumulation and gross revenues grow, and so they mask falling incomes of added unit of the capital). This property of marginalizm of the traditional capital became the reason for economic crash of many civilizations. It is creeping both to a businessman, and to the country, the gross revenues lulled by visible growth of the capital. But the capital is already struck with low limiting profitableness (from a mathematical word meaning "limit"). It hardly overlaps its costs. Thus, marginalizm is a rather powerful argument to ignore risks of income reduction, which it gives to economic and even to political safety.
A "poor" businessman does not understand what is happening. He rushes to search income sources. He does not find them, and has to struggle with costs. In a course there is everything that will get at hand - as a rule it is the salary of employees. Here each subsequent step is predetermined by the logics of natural process. If not to accept time measures, and not to create a system of innovations, it will lead to defeat. Reduction of wages causes reduction in incomes of people. The fundamental universal proportions are broken. In its turn it reduces consumption (for less income brings less purchases).
Businessmen try to compensate missing internal consumption by external consumption. That leads to lobbying with external economic stimulus. As soon as the government agrees to that, the trap will slam. The only way out is the crisis and depreciation of the traditional capital.
The experience of development of the world civilization and world economic idea has proved, that only innovation provides economic growth in the long-term prospect. It also gives a gain of enclosed capitals. Other factors absorb, redistribute, and reduce this income. Growth of population, nominal and real incomes also can promote the economic growth, but this factor is limited. Accordingly the accumulation of the capital can work for economic growth. This factor of growth is limited too. It is the border where limiting costs on the capital unit start to exceed limiting incomes of the same capital unit.
All this dictates the unequivocal conclusion that any capital investments, except for innovative, lead to defeat in economic race. And only marginal mechanisms can serve as primary indicators of an innovative vector. Finally only under the influence of an innovative growth of incomes of each enclosed unit of the capital is marked. Thus, having razed marginalizm to the ground, Bolsheviks provoked economic defeat in the long-term period. And if we do not pay proper attention to this problem today, we may expect serious losses of incomes in future. Both the business, and the government should take into account and level these risks.
Lets consider Chinese experience as a convincing example. The country has revived marginal mechanisms in the centers of economic growth at the end of 60th. It was its essence (In the former USSR they were called "traitors" of socialistic ideology). China and the USSR today should become a convincing visual aid about opportunities of a great force. It can break a mighty civilization, and restore a highly populated country.
Now we may make conclusion. When there is no marginal growth of profitableness of the innovative capital, free and unbound capital is mobile as mercury, and it searches for other favorable opportunities. These opportunities coincide with a certain algorithm (for discussion). One is for scripts with ideal innovative strategy. The other (also determined) is for a case of absence of such strategy. Growth of excessive activity in the real estate sector indicates the second algorithm.
2.
Only people's savings in a national economy are a source for investments. Here we use investments as the capital consumption, (by J.M.Kains). It is possible to object, or argue about that. But close examination of the process convinces that the only source is the population (households). And there is no other sources in the long-term period. (For our homebrew "socialistic" political economists this conclusion often seems unexpected).
The category of savings has a special evolutionary sense. It is linked to time. Everyone who carries money for deposit thinks of his future, of the goods he will buy, or rest he will take, or his black days. A Person is an open economic system, which suffers the influence of risks. Savings should block and level the future risks.
When an Innovation appears, the future ceases to exist, and becomes the immediate present. A person wants to get the innovation, even if he does not have enough means. And destitute feel those, who cannot make it. That is why the innovation is a powerful attractor both for capitals, and for savings. What is the most important, it gives incomes for all institutional economical sectors. That is why it differs from the traditional capital, which redistributes incomes, and divides for poor and rich.
But if there is no Innovation, and no reliable monetary tools to save incomes, people will search for other reliable tools. Be sure, they will choose the most reliable of all existing. So a Person as an open system survives.
The real estate became such a tool at present. The market of the real estate in Ukraine and in the CIS and falling of a dollar exchange rate in the world markets 2-3 years ago concurred not occasionally. Till 2002-03 the dollar worked for protection of people's income. After it became the real estate, for neither the dollar, nor gold seemed reliable for people. They did not justify their hopes for future any more. The grivna was adhered to dollar, and the significant part of savings has remained in this tool.
Income transition into the real estate, and its use as the saving tool became an additional source of a consumption gain in the market of habitation. It has incorporated with natural demand for habitation. They promoted the attraction channel for capitals with a positive and strengthening feedback. The mechanism is characterized by strengthening of demand for apartments. The avalanche rise of prices is the result of reaction of the market speculative operations. All the other is clear and trivial.
The moment when the natural mechanism of primary demand for habitation is already almost oppressed with high market prices. Empty windows of new buildings prove that. But the mechanism of capitals attraction continues to operate on inertia, and threatens the market.
When a systemic innovation appears, it creates a powerful attractor. It is the mechanism of capitals and savings attraction. However an innovation gives additional income. The additional profitableness promotes all other markets, not like traditional capital. At each additional investment, marginal productivity is reduced. It makes the civilization poorer. It is happening in Ukraine today. The innovation creates new income. It is redistributed both through the markets, and through the institutional economy. The state receives high additional income into the budget. Thus, the traditional economy gets its share of additional incomes. But the mechanism of this additional charging is different. It goes from growth of all the nation welfare through an innovation, which cardinally changes the economy.
Risks
Price rise for traditional resources makes the greatest danger for the channel, which would attract traditional capitals.
In the intermediate term price rise for traditional resources can cause at least two types of risks. These risks arise every time when a powerful attractor appears, if its root is in the traditional economy.
The first risk is the obstacles for innovation. It is because resources are taken for the growth of traditional economy. The consequence is that products attractiveness reduces in intermediate term prospect. Resources of the traditional sector cannot meet technological requirements of a higher quality. The attitude to the products created in result of boom in traditional sector is clear. Fast transition to a new technological way is impossible. Constructions of processing factories, materials, qualified personnel, etc. need time and money. Economy suffers crisis. Consumers' preferences are reoriented for production of more high quality.
The second risk for the country is to become a country with lagging economy. The prices for traditional resources cause excessive inflation of costs. It overtakes the income of people and business, and reduces the consumption and economic growth. Attempts of the government to settle a problem, passes to a struggle against incomes at an economical sector. These problems do not arise, if the innovation has added income in economy. Prices grow, but income is sufficient to sustain them.
Therefore there is only one way out - to direct free capitals for the innovative attractor. It will create an additional, an innovative income. Here, banks are very important. They care about economic safety of business, and are good for new directions of capitals. History has many examples. (i.e. the Rothschild's story.)
The conclusion: increase of demand for habitation in Ukraine and CIS indicates, that there are no effective innovations in the countries.
However there are many obstacles for transition to innovative development in Ukraine. We will not dwell on this issue, but want to underline one point. Every country, which became an economic leader, experienced becoming of national identity, and was supported by home science.
© IEE , 2005 http://iee.org.ua/ru/
© I. Makarenko http://iee.org.ua/ru/persons/
Together with V.P. Kuzmenko, and M.M. Voronchuk http://iee.org.ua/ru/persons/
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