future of the economy, George London

Future of the Economy #2(a) – Rich Hypothetical Society, Poor Hypothetical Society

June 3, 2012 George LondonLeave a comment

Earlier today, I was on a plane without wifi. Trading one type of cloud for another freed me to continue my gradual explication of our economic future.

Last time, I argued that “the economy” is the total sum of everything useful to human life, and that “prosperity” is the sum of all those resources divided by the number of people enjoying them.

Today, I’ll cover why and how the prosperity of a society changes through time.

We’ll need three more concepts:

1) Production

2) Consumption

3) Wasting (e.g. rotting of fruit)

Tautologically, everything man-made was produced at some point. So:

Total amount of stuff we have (i.e. “Wealth”)

equals

( Natural Resources plus Everything Ever Produced )

minus

( Everything Ever Consumed plus Everything Ever Wasted )

Prosperity changes because of relative changes in the rate of production vs. consumption. Societies get richer when they produce more than they consume, and get poorer when the consume more than they produce. This may seem obvious, but all the crucial parts of macroeconomics spring from this notion.

Why do these rates change? Three reasons:

1) Exogenous

2) Cyclical

3) Secular

Exogenous reasons are usually-random, usually-one-off events like wars or gold strikes. Cleary, being sacked by Mongol hordes makes you poorer, and I won’t cover these types of events here.

Cyclical reasons are what underlie normal recessions and expansions, and (by-and-large) are caused by changes in the amount of money people borrow to consume or invest. When people borrow and buy a lot, we have an expansion. When they borrow less, we get a recession. The most important factor in consumer borrowing is the interest rate (how much do I have to pay tomorrow for the $10,000 car I bought today?) People who can explain exactly what determines the prevailing interest rate tend to spend more time on mega-yachts than in coach class on US Air, but basically: the interest rate is set by the Federal Reserve based on (a much more complicated version of) an equation called “the Taylor Rule”. Cyclical factors get a lot of attention because their effects are easily and immediately noticeable (and crucial to trading financial markets), but ironically, cyclical factors usually matter very little to long-term prosperity (for the same reason that most waves don’t affect the sea level.)

I’ve hit my self-imposed word limit, but next time I’ll discuss secular reasons, which – forgive the pun – are where the money is.

Future of the Economy #1 – What is An Economy?

March 30, 2012 George LondonLeave a comment

Last time, I laid out my roadmap for describing my vision for the future of the economy. Now, again awaiting an algorithm’s end, I take the first step.

Today’s topic is simple – “what is an economy?”

Whether you’ve studied economics or not, (and I never have in any academic setting), that is a tricky question.

To some, the economy is “the intersection of supply and demand.” To others, it’s what falls out of comically complex equation like these. To the dictionary, it’s:

3. the management of the resources of a community, country, etc., especially with a view to its productivity.

4. the prosperity or earnings of a place.

My more modest proposal – “the economy is everything.”

Or, less dramatically, everything (even potentially) useful to human life collectively constitutes “the economy.”

Some examples, in order of increasing controversy:

Economy:

Yellowstone National Park

Cats

DNA

Human Life

Not Economy:

Crab Nebula

As I’ll explain more clearly in subsequent posts, it’s significantly more cogent to include immaterial “objects” like interpersonal relationships, human knowledge, or natural beauty in our definition of “economy”.

Every useful thing, whether material or immaterial, can then be labeled a “resource”. The economy is merely the sum of all resources.

A brief aside – taking a broad view of the economy can be a dangerous game, and there are many very powerful ethical arguments to be made against viewing human relationships etc. through an economic lens. The core fear is that we will start treating human relationships with the sort of “non-ethical, anything-for-a-dollar” ethos that permeates the phrase “it’s not personal; it’s just business.” Instead, I am hopeful that we will instead do the reverse and allow human decency to seep back into traditional economics.

Now, one more step. The size of the whole economy is much less important than prosperity, which is the sum of all resources divided by the number of people utilizing those resources (i.e. Sweden is a very prosperous country, but if we divided the wealth of Sweden across the population of India, the resulting country would not be very rich at all.)

Good economic policy should have a single-minded focus on increasing prosperity (properly conceived, so that we aren’t bulldozing geysers to build factories.)

But how exactly do we increase prosperity? Tune in next time…

P.S. It makes me smile that “bulldozing geysers” formerly had no Google hits.