Demosthymos (demosthymos) wrote in socratescafe,

The Driving Forces of Economy

Hello all, here's an essay I've written in response to some of the people I've been meeting (on LJ and other places...)

It seems the more people I come in contact the more people I find who still have a basic distrust for both currency and commerce. Quite frankly, I'm surprised by this. Now, I'm hardly going to defend all businesses everywhere (many of the largest are led by decieving crooks). But until one has a firm understand of the basic prinicples of economics, I don't see how he or she can make at practical decisions or intelligent philosophical assertions (that deal with how people should live). The simple fact is that economics is study of meeting human needs. It is the study of the social interactions that are mankind's most powerful force in survival and propsperity. This will be something a primer of the information you'd get in an economics class.

Starting With Bartering, Why Bother?
Let's take a simple case, the world has two people in it who both need baskets and meat. There are two ways that they can both get baskets and meat:
1. they both produce their own basket and their own meat
2. One produces baskets for both, and the other produces meat for both

The interesting thing is that the second basket is a lot easier to make than the first. You learn during the first basket-weaving process, and you can make the second one better and faster. Also, meat doesn't usually come in single-serving packages. You kill what you can, and then you eat what you need. The the extra you can store it (if possible), share it, or let it go to waste. So if you specialize in this way, both people save time and work by specialzing and trading.

Say the first basket takes 1 hour, and the second .5 hours. And it takes 6 hours to kill a deer, but it feeds 2 or more people. In option 1, both people spend 1 + 6 hours, so 14 man hours are spent meeting these needs. In option 2, one person spends 1+.5 hours and the other spends 6 hours, for a total of 7.5 hours. The 6.5 hours of work saved represents wealth created. No one was cheated. No one was exploited. The surplus is a natural fact of cooperation.

(In the hunter-gatherer stage, you basically only trade with your family, so formal accounting isn't as necessary. It's okay to be communal, because you're not going to let anyone starve if you can help it. They won't let you starve either.)

This truth led people to barter their goods and services back and forth, because it took less work. In reality though, there are a lot more people and a lot more goods and services. This puts up and interesting problem. Everyone needs meat on a regular basis, but how many baskets does anyone really need? So the basket-maker could only trade so much (directly) with the hunter. But someone else might need a basket. That someone else, though, might not have anything the hunter needs. Making a trade now requires figuring out a potentially long chaing of transactions so that a basket-maker can get meat and the hunter can get what he or she needs.

(One of the keys here is that the group of people you trade with becomes much larger than the group of people you identify as your family. So you have to keep track, communal living doens't work anymore.)

Also, the hunter may only be able to produce meat in a particular season. So he or she may have a lot to trade at one time, but very little to trade at another time. It would be useful if the hunter could trade more than he bought when meat was plentiful, and then use the surplus to support him during the off-season.

For these two reasons, people invented currency. Currency is a store of value that allows people to transact business when one person wants something another has to offer, but the first person has no goods or services to directly offer in return. Thus, it eliminates the need to setup that long chain of events to buy your meat.

Also, the surplus lets people save for the future, even out seasonal variations in income, and save value to make purchases that would be too expensive to feasibly do otherwise. (How many toothpicks do you have to sell to buy a car?)

So the main force behind the economy is that specialization and trading yield real wealth gains. The things that were hard to do become easier, and they take less time. At first the cycle is driven only because it there's an efficiency gain to doing things for more than one person at a time (babysitting 10 children doesn't take 10x the effort or time as babysitting 1 child). But then, it becomes driven by technology and training poeple need to use, maintain, and advance the technology, individual skills like basket-weaving, spearmaking, tracking, etc. These skills take time to learn, and it quickly becomes infeasible to have everyone learn them to same degree (you get a bunch of leaky baskets, crooked spears, and inobservant hunters).

Unexpected Consequences
The next step is that the technology takes on a power and momentum all its own. Whole areas of expertise are created to support particular technologies that make an age-old task better, easier, etc. For example, imagine the number of people that gained employment because someone figured out the first metal was useful as a weapon. Suddenly, people had to dig it, purify it, and turn it in to arrow-heads or whatever. Those jobs didn't exist before, and you might think it wasteful to have all these people working to do what could be done with other materials before. But the advantages out-weighed the cost. Metal was that important.

Also, we have to remember that as soon as these technological advances occur, the improve human life in a measurable way: the death rate drops. So now, people live longer, but reproduce at the same rate (or sometimes a little faster). Population expands, and you have a bunch of people vying for resources. This competition becomes the primary driving force in technological advancement.

Societies that do it well grow, prosper, and have the power to defend their lands (and take land from others). It's not pretty, but it's straight-forward. Economic and technological advancement fuel the power of human societies. If your society is more efficient, it can use its resources better. It can support a larger population. It develops technology faster. These all add up to military strength. This is important when you have groups that compete for territory.

One of the keys here is that technology is at such a stage where technology is advancing, but at a rate that is so slow, no individual really experiences a significant increase in the world's wealth during one lifetime. So the world might be wealthier over the period of a life, but not by so much as to make a real difference. So the only way to get richer (as an individual or a society) is to take wealth from other people. Societies take valuable resources. Individuals capture more the wealth generated from transactions.

Once technology reaches a certain stage (the industrial revolution, maybe? or maybe the information economy of the last 25 years or so?), technological payoffs start to become more immediate. By building the steam engine, the world gets significantly wealthier within 50 years. The computer did it in about 15-20. The Internet has already made big impact. So now, the best way to become wealthy is to become one of the driving forces behind real efficiency gains that increase the wealth of the world. Everyone benefits when the cost of production of meat goes down.

The same driving forces that motivated bartering have always been in effect. The rate at which the effect were appreciable has changed. Many of the classic objections to capitalism, commerce, money, etc. have been based on the fact that people are mean when they have to fight each other for wealth. But the proces of wealth-generation is fundamentally good.

Sharing the Wealth
There have only ever been two ways of distributing wealth: by trade or by force. Taxation is force. Wealth redistribution is force. Communism is by force. Capitalism is the only modern economic system that enables wealth distribution by the consensual transactions people choose to engage in.

Capitalism rewards people for finding ways to do things better. This motivates people to make us richer. One way to measure wealth is by a bank account. But a real measure of wealth is % of income. What % of income would an average person in America have spent on food 100 years ago? I bet the same foods are a lot cheaper as a % of income now. Even if people spend the same % on food in general, the food quality and variety would be higher. Plus people go to restaurants, where they pay for service.

To put the equation simply, let's look at an example. DSL currently sells for say $35/month. (And maybe a profit of $10/month for the company). If someone comes up with a technology that can provide the same service for $25/month, but it only costs them $10/month, then the company makes $15/month. $5/month per user more than the DSL company. If I can do this and get 10,000 customers, each year I make $600,000 more than a similarly sized DSL company. I get wealthy! But my customers have also saved $1.2 million! My customers have more money to spend other things. We are all wealthier (except the DSL company).

Any communist out there is failing to realize that communism destroys the motivation for people innovate, crippling a society's continued gains in wealth. (Not to mention the fac that the course of human events is not predictable like an eclipse, something Karl Popper explains in The Poverty of Historicism.)

Anyone who support central planning is missing the fact that these advancements are achieved by many many people working in multiple directions to solve the same problems. Some ideas work out, some don't. There's no way a central agency could manage all the parallel research and development.

Anyone who doens't like capitalism is failing to see that capital and profit allow people the surpluses they need to experiment, makes mistakes, and explore. Without them, people wouldn't have the resources to try new things.

Anyone who thinks that all workers are being exploited is forgetting that these workers (in most cases) aren't forced to work in the jobs they do. They choose to do so, becaues it is the best work they can get. Sure, some of these jobs suck. But the solution is to create more wealth so that they can afford to reject the really bad ones. Until that happens, all anyone can do is make the decision for them: work a horrible job or live in even more dire poverty.

Things only get better with the spread and advancement of technology. We all need to push it and get out of each other's way. If there something going wrong in the economy or a particular industry, the way to solve it is to find a better way and do it yourself (for tremendous profits!) Everything else is just whining. (And no, I don't think the modern American economy is perfect. It's also not purely laissez-faire capitalism, though I'm not sure that's a good thing either. But we have something that is working, and rather well, right now. What do you propose that will be better? It's not good enought to point out errors and flaw, what do you propose that would actually work better? That wouldn't create far more serious problems that those it solves?)
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