Tuesday, 10 January 2012

Why should you always have more?

Here is a basic analogy for how the economy works. We have two men and they both work 1sq km of farmland each. They spend all their working day farming and their evenings cooking and cleaning and they create enough food to survive. One day one of the men invents a tractor and fertilizer and the other one retrains in domestic services so they decide to specialize. Since they are specialised and have a tractor they manage to do their jobs at 2 x the previous productivity.  Now tractor man works 2sq km of farmland all day while services man cooks and cleans both their houses all day. Now they both have enough food and clean homes so in the evening they can relax and write songs, paint their walls or worship satan.

Economic growth is therefore not a zero sum game. We can each end up with more by specialising and using capital (machinery) in order to increase the productivity per person. So if we take my simplistic analogy and then extrapolate it out to our highly specialised modern society we can see that by each person doing their own specialized thing in the economy we can all do more, achieve more and have more in our lives. As we invent new technologies and working practices which allow us to do more we can expand our economy (GDP) which is simply an estimate of the total value of goods and services produced in a nation.

However a lot of people seem to have mistaken the drivers of economic growth (productivity, technology) for a sense that economic growth is a process which has its own momentum. There appears to be a popular view that standards of living should always rise due to some exogenous factor. This my friends is called ‘entitlement.’

There is a certain irony that in the west for many years we have decried the pitiful poverty of those in emerging markets and yet today as they grow and become more productive we decry the loss of our living standards. Again economic growth is not a zero sum game – we have enjoyed cheap Chinese goods for decades now – but when those Chinese workers start to demand more meat and fuel that hurts our living standards as those resources are finite (unlike services for instance.) Globalisation as a process has brought great benefits in trade to the west with cheaper goods and a more competitive global marketplace. But guess what – it’s a two way street. This means that all western workers are now in competition with those in the emerging world as the shipping container has flattened the geographical constraints present in manufacturing before 1970. So if you want rising living standards you need to work harder for them; be more production, bring more technological change.

There is a whole other philosophical question of how much is too much? As Seneca is oft quoted “To greed, all nature is insufficient.” However as we decry the loss of our living standards we should remember just what it is that supports these standards; Ingenuity, creativity, challenges and hard work. When George Stephenson pioneered the steam locomotive or Bell invented the telephone or Steven Jobs pioneered the iphone or Aneurin Bevan founded the NHS they had visions which changed our world and allowed us to do more, achieve more and live longer thus perpetuating economic growth. We certainty do not have a divine right to more things and ever higher standards if we are not willing to assign the effort and make the sacrifices necessary to achieve them.

The first soap was made from the ashes of heroes, like the first monkey shot into space. Without pain, without sacrifice we would have nothing”

-          Fight Club

1 comment:

  1. This exact idea has been on my mind a lot recently. Thank you for hammering it out and saying it better than I could.