There’s a peculiar little saying that many of you have probably heard, and that is “to pull yourself up by your bootstraps”. The implication here is that, without any help from others, you can work hard and make it in the world etc. etc. It is an especially favourite refrain of libertarian and other politically-conservative movements who like to frame “I believe in hard work” against “I believe in government handouts”. Herein lies one of the fundamental problems with any kid of libertarianism-based economic doctrine, and that is that there is a tacit assumption of the independence of individuals in an economy. On the surface of it, this all seems great. Work hard and you’ll do well… and if you’re not doing well, then you’re obviously not working hard enough.
Of course, large scale economies inevitably have their ups and downs. When there’s a down, it’s all the fault of big bad government, and when there’s an up, it is all on the shoulders of the hard working people. It surprises me that such simplistic, and obviously incorrect, reasoning can still pass as an “argument” from a politician… although, having observed similarly simplistic “kindergarten politics” at work at the pointy-end of climate negotiations, maybe I shouldn’t be so surprised. The truth of the matter, is that no single person can be successful without the cooperation and help of many others. And I’m not just talking about the obvious sources of help, like your immediate family, or emotional support from friends or a spouse, I’m talking about countless numbers of complete strangers who you will never meet, and who may not even speak the same language as you.
This is the result of globalization, and it is a good thing. Globalization has allowed us to distribute labour and resources like never before. This allows for spectacular increases in efficiency, and therefore productivity. So why do so many people protest globalization? Well, the productivity pie has certainly gotten bigger, but the slices of that pie that people have been getting have not always followed suit. Why has this happened? It’s because of democracy. When people come to vote, it will always be for their own best interests and that will often mean that governments will be encouraged to pursue foreign policy which is “not nice” towards the interests of workers in other countries. I was recently in a discussion about an upcoming election (which may or may not have been mentioned previously on this website) and one of my friends asked me “should I vote for myself or for my country?”, implying that she had to choose between her own self interest and the longer term interest of the country. Of course, the choice of voting in the interests of “the world” isn’t even on the table.
Environmentalism pretty much never makes it to the table as far as election issues is concerned. Sometimes small pockets of voters will make it important to an equally small pocket of politicians, but it probably won’t become a major issue until the environment begins to affect everybody’s everyday lives in an obvious way. The economy is where it’s at. Anyone who’s had to sit through one or two elections in any country knows that the hip pocket is the surest way to any citizen’s vote. Whenever a politician has to frame a debate or a policy decision, it must always be in terms of a voter’s (often) first response – “what’s in it for me?”
Recently, something that everyone seems to be getting rather obsessed about is the budget deficit. I’m not referring to any country in particular in fact, as most countries run some amount of deficit. Everytime a government opens its purse strings to spend some money (as is inevitable in the running of a country), this falls under “deficit spending”. Deficits are easy tools for the politically-minded. First of all, the nonsensical comparison between personal debt and a national deficit is an easy one to make and use. It makes it easy to convince people that the deficit is “bad” and adding to it in any way is “worse”. The inability of most people to think much further than their own personal affairs only makes this psychological trick an easier one to pull off. Of course, if a government really needs to spend money, then this can be a problem.
I’ve been thinking a lot about what this actually all means. I have concluded that these deficits are simply “tomorrow’s money” being spent today. We shouldn’t be frightened of large numbers, which is something that deficit scaremongers have a tendency to try to make us scared of. Deficit numbers are often very big, but they should be taken in context of other things, like growth and GDP, and happiness index, for example.
I was thinking about what money actually means. We make stuff, and we have to exchange it, so we start swapping bits of gold. Eventually, it becomes too inconvenient to cart around lots of bits of gold, so we swap it for receipts, and just swap those instead. So by that logic, we should have stayed on the gold standard right? Well, no. Gold was only a convenient medium of exchange because it was rare and didn’t corrode easily (at the time that currency was invented, it may have been the *only* metal that man had access to). It is only a medium of exchange, it doesn’t *mean* anything. This is no compelling reason to tie up our money supply to gold. I think the only reason that the gold standard appeared to work as well as it did for as long as it did, was because the world’s economic productivity remained essentially the same up until the industrial revolution.
Of course, fiat money has its own problems. Nobody really knows how much it is worth. In fact, the only real definition for how much it is worth is “how much you can get for it”. During my time at Columbia University, we had many and frequent discussions about ending poverty. One of the more insane ideas that came up was to print lots of money and give it to poor people. Obviously, this wouldn’t work because as you print more money, with nothing to back it, it is effectively worthless.
What does back our money up? Is it the amount of stuff in the world? I don’t think so. When we take a raw material and make it into something useful, we add value to it. Perhaps the amount of money is somehow reflective of the amount of capital + labour in the world? Maybe. I was thinking about the growth in financial markets recently and about the value of speculating. I have determined that there really isn’t very much value to all the speculating, and that all of this extra growth in the economy which has supposedly come from the financial sector is actually a fraud. Moreover, all the extra money has gone into the coffers of some very mediocre people who think the world of themselves in the form of obscene bonuses which are not-at-all representative of their contribution to the economy.
So if the value in our economy doesn’t come from ego-inflated investment bankers and hedge fund managers, then where does it come from? If we go back to the econ 101 definition of economics as the way in which we distribute scarce resources, then perhaps the value in our economy just comes from stuff. Or stuff + the value that is added by labour. However, if you think about this deeply for a while, you come to the inevitable conclusion that the system will blow up in our faces because we will eventually run out of stuff. Oil, metals, and minerals will eventually run out.
Of course, one can argue that we can recycle a lot of those things, but the truth of the matter is that we don’t. Our economic system should make it prohibitively expensive NOT to recycle these non-renewable resources, but it doesn’t, because the system is created and shaped by myopic idiots. Of course, that’s not exactly fair, the people who dreamed up this economic system never had to deal with 6 billion people and lived at a time when these resources were virtually limitless. Also, everything is renewable is you take a long enough time frame…
So what is really happening? When we burn oil, we’re not burning money, we’re simply borrowing it from the distant future at a time when that oil replenishes itself. The same can be said of other supposedly non-renewable sources. So now we’ve reduced all consumable resources into practically the same terms. Obviously, fish stocks replenish themselves much more quickly than iron ore would (but that doesn’t stop us from overfishing, does it?). Perhaps an interesting intellectual experiment would be to consider this “borrowing from the future” in the same terms as taking out a loan from a bank. The interest rate would be tied to how quickly you could pay it back AND how quickly the resource replenishes itself, which in the case of something like iron ore or oil, would be extremely slow, therefore making these loans extremely expensive. (which is how they should be)
So, for all resources, we have some kind of “sustainable” carrying capacity and anything above that is borrowing from the future. What determines this carrying capacity? Now I get to use a common refrain of the climate science skeptics – it’s the sun, stupid! Those of you who paid attention in high school physics will be familiar with the concept of the conservation of mass. Thanks to gravity, very little mass from the earth escapes into space (the weight of all our artificial satellites is negligible) and even on very long time-scales, very little mass is ever added to the earth. The sun provides all the energy for converting one kind of matter into another kind, therefore the “budget” of the earth is ultimately limited by what the sun provides (there is a rather big exception here, in nuclear energy, but I’m going to ignore it for the moment).
So there you have it. Somewhat counterintuitively, the amount of value in the economy shouldn’t be determined by the amount of “stuff” in it. When you think about it, it actually makes a lot of sense. Under the current system if I dig a lump of gold out of the ground, I can sell it and become richer. If you really think about that for a while, you realize just how absurd the concept is. However, if I take the energy of the sun and use it to produce something that we can eat, then I am converting something that is useless into something that is useful and actually making a contribution towards the world economy. Likewise, any process requiring labour is using energy to add value to something and so contributes to the economy as a whole. Speculating can be useful to a point, because it encourages investment in (it is assumed) more efficient enterprises over less efficient ones (here, the questionable substitution of “efficient” for “profitable” is made) but we are well past that point.
Of course, you try explaining all of this to an i-banker… they’ll think you’re crazy, and you probably are. But this all sounds so crazy, it just might work.