December 21, 2015

The Jeddah Tower, the Tower of Babel, and Sound Economics

By In Blogs, C.Jay Engel

I was talking today to a Christian acquaintance of mine about the Jeddah Tower being built in Saudi Arabia. According to Wikipedia, the Jeddah Tower

kingdom-tower
The Jeddah Tower: a product of central banking exuberance

is a skyscraper under construction in JeddahSaudi Arabia, at a preliminary cost of SR4.6 billion (US$1.23 billion). It will be the centrepiece and first phase of a SR75 billion (US$20 billion) proposed development known as Jeddah Economic City that will be located along the Red Sea on the north side of Jeddah. If completed as planned, the Jeddah Tower will reach unprecedented heights, becoming the tallest building in the world, as well as the first structure to reach the one-kilometre-high mark. (Initially planned to be 1.6 kilometres (1 mi) high, the geology of the area proved unsuitable for a tower of that height.) Jeddah Tower seeks to bring great changes in terms of development and tourism to the city of Jeddah, which is considered the most liberal city in Saudi Arabia.

There is a something in Austrian circles called the “Skyscraper Indicator,” which was popularized (as much as Austrian themes can be popular) by Dr. Mark Thornton. Basically Thornton draws attention to the historical fact that there is a interesting correlation between the building of a new massive skyscraper and the end of boom phase of a business cycle. The Austrian explantation for this would be the fact that the expansion of the money supply leads to the misallocation of scarce resources into projects that the economy cannot actually afford. Record breaking skyscrapers require a huge amount of resources and, in affirmation of the Austrian Business Cycle Theory, such a massive project only appears profitable due to the artificial suppression of interest rates. Without getting into the details of it, skyscrapers (or any project) that are funded by newly created money put a severe strain on society’s resources. The only way to sustainably build such skyscrapers is first to build up savings in the economy and to invest capital into long term projects.

Now, in talking with my acquaintance I noted that the Jeddah Tower may be, if the project can actually be completed (after all, one aspect of the business cycle is the fact that there are many projects that need to be abandoned), the tallest building in the world and the picture above is stunning in its apparent stretch toward the heavens. But perhaps such exuberance isn’t sustainable, due to the source of its funding. My acquaintance then commented something that I think adequately reflects some thinking in Christian circles: “just like the Tower of Babel, men think they can build these buildings to heaven, but ultimately they can’t.”

While pious sounding, he missed the entire point. The problem is not that men shouldn’t try to build the tallest buildings in the world; and neither is the problem that men aim too high in their efforts to attain stunning accomplishments. The problem with the Jeddah Tower is not that men are arrogant to assume they can build such modern wonders. The problem is not that man wants to attain too many material things (who would have thought 300 years ago that millions of people could have shelter with electricity and indoor plumbing?), the problem is when we try to get them without actually paying for them, saving for them.

The problem is one of economics. The project was a result of the expansion of the money supply and the lowering of interest rates. That is where the root of the problem lies. Before these projects are sustainable, they first have to be saved for. It is only by capital accumulation that the resources required for building a skyscraper can be made available.  Unfortunately, in our world these buildings are the result of the misleading people into falsely thinking that the resources are available, when in reality they are not. The falsification of resource availability comes about by the artificial lowering of interest rates.

God has given man the ability to do great things. And we should certainly aim to do these. But the boom bust cycle is a reminder that great things cannot come by way of printing money and manipulating the pricing structure of an economy.

Written by C.Jay Engel

Editor and creator of The Reformed Libertarian. Living in Northern California with his wife, he writes on everything from politics to theology and from culture to economic theory. You can send an email to reformedlibertarian@gmail.com