On why the economy is of a fixed size
At work the other day, my colleagues greeted with gasps and dismay the news that the British economy had shrunk by 0.5% in the previous quarter. This negative growth is supposed by many to be an indictment of the economic policies which have been so rapidly implemented by the new Liberal Democrat-Conservative coalition, led by Nick Clegg and David Cameron. The chief architect of the new economic plan is held to be George Osbourne, whose youth and relative lack of senior political experience is held as meaning that he is unqualified to be making decisions of such a great magnitude.
What I hold opposition with, is not the notion that these cuts are necessary or unnecessary, nor that they are disproportionately harmful to one or other social class - these are other questions, secondary questions, that I believe I can show to be otiose, founded as they are, on the ill-substantiated proposition that economic growth, as a phenomenon is a worthwhile one. I don’t deny that it exists, but I hold that if we unpack what it truly means, then we will find that it is at heart, a pointless endeavour that is little worth all the time and effort that we have expended, and continue to waste, chasing it.
I’d like to begin with the news item that I began with - the announcement that the British economy had “shrunk”. What on Earth could we mean by this? Or what could we reasonably be expected to take a pronouncement like that to mean?
What this means is, as simply as could readily be put, is that the value of traded goods and services has decreased. Already it seems we are in trouble, as one obvious question announces itself here. Why is it such a bad thing that traded services have decreased? One simple way in which this might have transpired, is that people, who formerly relied on someone else to provide a service for them, is now capable of providing that for themselves. So far, so good - there is no crisis here. If I now paint my own house, cook my own dinner or entertain myself by reading ( a book I already own), writing or playing a musical instrument, then this need be no bad thing. Indeed, we might rather say, it’s a positive thing, that now I have learned to provide for myself and am no longer beholden on others to provide me with entertainment or other, more vital services.
But economists don’t like self-sufficiency. The edifice of Western economic theory is predicated on a few simple assumptions - one, being that there is always a comparative advantage that exists between individuals. This is true enough, but economics is quite rigid and deterministic here - it assumes that whilst there is one unique skill which I am always better at providing than someone else , this skill is fixed. If I am the best tailor in the neighbourhood, then that is my skill and forte and I am duty-bound, by the dictate of economic efficiency if nothing else, to keep on performing this role for ever and a day.
But what if I change? What if I get bored, get worse (absolutely or relatively) at this job. Maybe my friends and relatives, or a neighbourhood rival sees me doing my job and decides that it looks like fun, and he can do it better than me. He practices, hard, every day and before too long he has overtaken me and now produces my goods or the service that I used to provide, better, cheaper and more efficiently than I do or ever did.
The theory seems to suggest, or I at least assume its adherents would want it to, that I would be able to develop a new skill which I am better at doing than anyone else. This is certainly the case in countries, which is why we see the relative decline of countries which were former industrial leaders (for example, Great Britain), but has since been overtaken by countries which are able to do what they did much more cheaply.
Economic theory then, seems to have headed off the challenge at the pass. It’s safe, because although I might lose my position of supremacy in a certain field, there is always a new one for me to pick up on. In fact, the dynamism of free-market economics needs there to be few barriers to entry and for countries and companies to pick up the challenge proposed by innovative practices and technology and try and beat them.
However, this isn’t really the challenge that I am proposing . Rather, I venture that the British economy, like any other is a closed system. In fact, they are minor facets of the overreaching truth, which is that the whole human endeavour is a closed system. This can be seen to proceed naturally from just a small number of axioms, which follow:
1. There is a finite number of humans on the planet.
There shouldn’t be any problem here.
2. These people have a set of tastes and preferences, which are themselves practically finite.
This is on tricky ground, as we would all like (presumably) to be infinitely wealthy without fetter on our abilities. But in a practical sense, there are only a limited number of cars that we can drive, houses we can live in - even exotic holiday destinations that we can go to. This is because we face a battle against time, that great cruel mistress of our lives. In our waking hours, there is only a limited number of experiences that we are capable of enjoying. This last point is important, and perhaps controversial, as it implies that however hard we drive towards increasing consumption, there will become a point at which we become struck with ennui, boredom, fatigue - call it what you will, but wherever you look the lifestyles of the rich and famous, when you look within, are usually hamstrung with a faded sense of emptiness. It might seem unusual, or out of place to afflict economic considerations with ethical judgements, but this relationship should never have been sundered, as unnaturally as it has been, since the time of Adam Smith. In his own time of course, he was an eminent moral philosopher, but the alacrity with which his followers leapt upon his economic theories to the diminution of his philosophical works has meant that his important moral legacy, which always tempered his ‘pure’ economic thought, has been lost.
The ship analogy
I don’t therefore, think that it is erroneous to suggest that there is a natural constraint on our desires and preferences. To this end then, the waxing and waning of economic fortunes, in the sense that the British economy has been reduced by half a percentage point, doesn’t mean much of any substance. It simply means that the allocation of goods and services has been changed. Nothing has been lost or gained - the analogy of a boat sailing on the ocean seas comes to mind. All that we are measuring is how large our allocation of the ship’s resources is. That might seem important, but if someone develops a new skill, for example, they fashion a crude musical instrument out of some equipment lying unused on the ship and begin to play a jig that entertains me and my fellow crew members, well, this is jolly enjoyable, and we might want to give him money or some other token of our appreciation to show him that we have enjoyed our performance. These gifts, provided they are of value to him and others, will enable an exchange system to develop, and hey presto, we have a rudimentary economy.
If this system persists in a myriad different ways and with different activities etc, then we have a more sophisticated economy that might begin to reflect what we know and recognise about our life in the real world. However, the principles that abounded at the start of this little vignette continue to provide a framework for this petit monde. If we attempt to measure the growth in this scenario, then it at once becomes apparent that it is a futile enterprise. All we are measuring, if you like, is how many different systems we have developed that lead to exchange of tokens of value. This is at best, a measure of sophistication of our economic prowess, in that we can see how many different habits, customs and practices, leisure activities etc we can develop that lead to an exchange of goods. In itself this is of no value, as we are not measuring how well we meet our underlying preferences. We are just seeing how many transactions there are.
Although each transaction meets a preference, there is a hierarchy of preferences which we should not be reticent to declare. Of the primary order are health, safety, shelter, food and drink - the basic order of material requirements for a human life.
Once these are satisfied, we can begin to start work on second-order principles, however, these are so less important that it is quite possible that they are not even commensurate with the first. These are, in the parlance of various agitators against the system, “created needs”, and we might live very well, indeed some would say better, without seeking to create and then satisfy them.
What I hold opposition with, is not the notion that these cuts are necessary or unnecessary, nor that they are disproportionately harmful to one or other social class - these are other questions, secondary questions, that I believe I can show to be otiose, founded as they are, on the ill-substantiated proposition that economic growth, as a phenomenon is a worthwhile one. I don’t deny that it exists, but I hold that if we unpack what it truly means, then we will find that it is at heart, a pointless endeavour that is little worth all the time and effort that we have expended, and continue to waste, chasing it.
I’d like to begin with the news item that I began with - the announcement that the British economy had “shrunk”. What on Earth could we mean by this? Or what could we reasonably be expected to take a pronouncement like that to mean?
What this means is, as simply as could readily be put, is that the value of traded goods and services has decreased. Already it seems we are in trouble, as one obvious question announces itself here. Why is it such a bad thing that traded services have decreased? One simple way in which this might have transpired, is that people, who formerly relied on someone else to provide a service for them, is now capable of providing that for themselves. So far, so good - there is no crisis here. If I now paint my own house, cook my own dinner or entertain myself by reading ( a book I already own), writing or playing a musical instrument, then this need be no bad thing. Indeed, we might rather say, it’s a positive thing, that now I have learned to provide for myself and am no longer beholden on others to provide me with entertainment or other, more vital services.
But economists don’t like self-sufficiency. The edifice of Western economic theory is predicated on a few simple assumptions - one, being that there is always a comparative advantage that exists between individuals. This is true enough, but economics is quite rigid and deterministic here - it assumes that whilst there is one unique skill which I am always better at providing than someone else , this skill is fixed. If I am the best tailor in the neighbourhood, then that is my skill and forte and I am duty-bound, by the dictate of economic efficiency if nothing else, to keep on performing this role for ever and a day.
But what if I change? What if I get bored, get worse (absolutely or relatively) at this job. Maybe my friends and relatives, or a neighbourhood rival sees me doing my job and decides that it looks like fun, and he can do it better than me. He practices, hard, every day and before too long he has overtaken me and now produces my goods or the service that I used to provide, better, cheaper and more efficiently than I do or ever did.
The theory seems to suggest, or I at least assume its adherents would want it to, that I would be able to develop a new skill which I am better at doing than anyone else. This is certainly the case in countries, which is why we see the relative decline of countries which were former industrial leaders (for example, Great Britain), but has since been overtaken by countries which are able to do what they did much more cheaply.
Economic theory then, seems to have headed off the challenge at the pass. It’s safe, because although I might lose my position of supremacy in a certain field, there is always a new one for me to pick up on. In fact, the dynamism of free-market economics needs there to be few barriers to entry and for countries and companies to pick up the challenge proposed by innovative practices and technology and try and beat them.
However, this isn’t really the challenge that I am proposing . Rather, I venture that the British economy, like any other is a closed system. In fact, they are minor facets of the overreaching truth, which is that the whole human endeavour is a closed system. This can be seen to proceed naturally from just a small number of axioms, which follow:
1. There is a finite number of humans on the planet.
There shouldn’t be any problem here.
2. These people have a set of tastes and preferences, which are themselves practically finite.
This is on tricky ground, as we would all like (presumably) to be infinitely wealthy without fetter on our abilities. But in a practical sense, there are only a limited number of cars that we can drive, houses we can live in - even exotic holiday destinations that we can go to. This is because we face a battle against time, that great cruel mistress of our lives. In our waking hours, there is only a limited number of experiences that we are capable of enjoying. This last point is important, and perhaps controversial, as it implies that however hard we drive towards increasing consumption, there will become a point at which we become struck with ennui, boredom, fatigue - call it what you will, but wherever you look the lifestyles of the rich and famous, when you look within, are usually hamstrung with a faded sense of emptiness. It might seem unusual, or out of place to afflict economic considerations with ethical judgements, but this relationship should never have been sundered, as unnaturally as it has been, since the time of Adam Smith. In his own time of course, he was an eminent moral philosopher, but the alacrity with which his followers leapt upon his economic theories to the diminution of his philosophical works has meant that his important moral legacy, which always tempered his ‘pure’ economic thought, has been lost.
The ship analogy
I don’t therefore, think that it is erroneous to suggest that there is a natural constraint on our desires and preferences. To this end then, the waxing and waning of economic fortunes, in the sense that the British economy has been reduced by half a percentage point, doesn’t mean much of any substance. It simply means that the allocation of goods and services has been changed. Nothing has been lost or gained - the analogy of a boat sailing on the ocean seas comes to mind. All that we are measuring is how large our allocation of the ship’s resources is. That might seem important, but if someone develops a new skill, for example, they fashion a crude musical instrument out of some equipment lying unused on the ship and begin to play a jig that entertains me and my fellow crew members, well, this is jolly enjoyable, and we might want to give him money or some other token of our appreciation to show him that we have enjoyed our performance. These gifts, provided they are of value to him and others, will enable an exchange system to develop, and hey presto, we have a rudimentary economy.
If this system persists in a myriad different ways and with different activities etc, then we have a more sophisticated economy that might begin to reflect what we know and recognise about our life in the real world. However, the principles that abounded at the start of this little vignette continue to provide a framework for this petit monde. If we attempt to measure the growth in this scenario, then it at once becomes apparent that it is a futile enterprise. All we are measuring, if you like, is how many different systems we have developed that lead to exchange of tokens of value. This is at best, a measure of sophistication of our economic prowess, in that we can see how many different habits, customs and practices, leisure activities etc we can develop that lead to an exchange of goods. In itself this is of no value, as we are not measuring how well we meet our underlying preferences. We are just seeing how many transactions there are.
Although each transaction meets a preference, there is a hierarchy of preferences which we should not be reticent to declare. Of the primary order are health, safety, shelter, food and drink - the basic order of material requirements for a human life.
Once these are satisfied, we can begin to start work on second-order principles, however, these are so less important that it is quite possible that they are not even commensurate with the first. These are, in the parlance of various agitators against the system, “created needs”, and we might live very well, indeed some would say better, without seeking to create and then satisfy them.