Everything you need to know about economics in 400 words, Part 3

It seems I only write on this topic while flying. So I guess you can expect this series to wrap up sometime in 2015.

But to recap, last time I told you that productivity is prosperity. So all increases in per capita wealth come from increases in the amount of economic goods a single worker can produce in an hour.[1]

So how does productivity increase? Let’s start with the obvious. We get the stuff we have by making complicated stuff out of simpler stuff. We start with iron and chemicals, apply some process over a period of time, and end up with steel. Visually:

(1 unit of Time + 1 unit of Iron + 1 unit of Chemicals) => 1 unit Steel

The productivity of this process is simply the ratio of inputs to outputs. If we rejiggered the above process to produce 2 units of steel from the same input, we would have doubled productivity.  Ditto if we halved the amount of time.

Physical productive processes are closely analogous to computer algorithms. We could just as easily talk about the “productivity” of a bitcoin mining operation in terms of how many BC a computer can generate per hour.

So how do we get more productivity out of our processes (which, to reiterate, is the only way we get richer overall)? Well, just like with computer algorithms we have two options:

Do the same thing faster (e.g. get a faster CPU)

Swap in a better algorithm (e.g. use quick sort instead of bubble sort)

“Do more faster” is an appealing tagline, but unfortunately human land-speed doesn’t follow Moore’s law. So our best option is to find better algorithms for our productive processes.

So transitively, the best way for society to get richer is to devise and select better processes. By and large, we call process improvements technology. The cotton gin and the Bessemer process were technologies that allowed radically more efficient transformation of a raw commodity into a finished product.

One of the most important stories of the last 30 years has been the way that computers have inserted themselves deeply into our economy’s various productive processes. But most of what we’ve seen so far are “do the same thing faster” improvements. The real productivity revolution will come once computers consistently help us choose better algorithms for our processes and for our lives.


[1] Okay, all increases except one-off “gold strikes” that shower us with random natural riches.