On Wealth...

The first class session of almost any introductory economics class is spent in contemplation and elaboration of the three word mantra of the discipline: “RESOURCES ARE SCARCE.” From this readily understood concept follows the idea of opportunity cost, which is the inescapable truth that every decision to consume is also a decision to forgo something else. In short, we cannot have it all. And so it goes; all of economics, from the simple idea that increasing the supply of a good decreases its price to complex constrained optimization models, follows from that core truth that resources are scarce.

This being said, we, particularly in the developed world, have done a miraculous job of reducing the sting of scarcity by increasing the size of our proverbial pie in leaps and bounds. We have achieved this through a number of channels that mostly come down to increasing our productivity. We can have more stuff because we earn more money because we are more productive, and, because we are more productive, there is more stuff out there to have. While you would never know it because we are amid a political season in which both candidates are trying to convince middle-class America that they understand how tough we have it as a means to persuade us about how many chickens they, as President, could personally put into our figurative pots, the standard of living and quality of life in America (and the developed world more broadly) is, by both historical and global standards, phenomenal. In fact, by a whole range of measures, we’ve got it better than ever (well, maybe not better than say a few months ago.) I encourage people to read Moore and Simons’ “It’s Getting Better All the Time” (http://www.catostore.org/index.asp?fa=ProductDetails&method=&pid=ELEC-0064). While I would not deny that the book does occasionally engage in dubious uses of statistics, the authors’ general thesis that, across a wide range of criteria, our quality of life has been rising is indisputable in most of the examples presented.

and Poverty

So how are we more productive? Technological advances are a patently evident cause of increasing productivity. Concepts like Moore’s “Law”, which states that the number of transistors on a microchip will double every two years or so, demonstrate an almost inexorable march of technological progress. The vast number technological improvements involving such areas as transportation, communications, medicine, and even the streamlining of processes by which we make things or provide services have had a major influence on the size of our expanding pie.

The gains of specialization, also the subject of early economics lectures that usually somehow involve Robinson Crusoe, are also a source of increased productivity. We have been riding such gains at ever diminishing levels of granularity throughout the course of our history as a species. In the move from hunter-gatherers to farmers, a few were able to make the food for many. This freed up the many to do other things, and allowed them band together in villages and cities. The process of urbanization led to synergies and efficiencies that further filled our coffers with wealth. We are still taking advantage of specialization, now on a global scale. There are people whose understanding of a infinitesimally small piece of the universe is vast. Some such people derive their entire income, often times a lucrative income at that, from expertise in the minutiae of a thing that can only seen through the eyepiece of a microscope, and whose implications are both narrow but still vastly wealth producing.

Unfortunately, not all of our means to become unshackled of the burden of scarcity are so virtuous as technology development, specialization, or collaboration. In America, we have also increased the pie by spending more than we have earned. The government, of course, has set an incredibly bad example by divorcing its decisions about how much to spend from trivial considerations such as how much revenue they accrue. As a nation, we run deficits with the rest of the world by buying far more from abroad than we earn by selling abroad. Through the “miracle” of credit, many individual households have also managed to follow the example set by the government’s lead, and spend substantially more than they earn. Of course, individuals can’t do this for anywhere near as long as the government can, and eventually something gives. When it gives, it does not necessarily do so in isolation, because lenders see defaults and panic (often justifiably) that they will be the next to be burned. Of course, there is nothing inherently wrong with credit, but, the unwise us of it appears to be addictive.

The point of this essay is that it is unclear how long the pie can be expanded, and, if it isn’t indefinitely, then we need to be ready for a new paradigm of economic life. In the long long-run, I don’t know the answer to this question. The universe is a vast (and presently expanding) place, and it seems that other consumers of its resources are, at a minimum, rare- if not altogether non-existent. Of course, we will be shackled to this planet by the limits of our technology for the foreseeable future, and the physical limitations of overcoming the vastness of space in a manner that is both cost- and time- effective may be forever insurmountable.

In the shorter-run, however, we can expect that we will bounce up against our limitation to expand the pie now and again. In fact, our current financial predicament can be seen as a hang up in one sector’s attempts to expand their pie. One of the few inevitable truths in life is that all progress produces not only winners but also losers. As Ralph Waldo Emerson observed: “Society never advances. It recedes as fast on one side as it gains on the other.”

The present story goes like this. Wall Street was hurting because everybody had begun to use automated brokerage systems and did not need to pay full-service brokers big commissions. The financial people looked around for a way to make money. They saw an ideal solution in an apparently robust housing market. They figured they could borrow money and then buy up these mortgages for houses that were steadily gaining value. But loan originators on Main Street as well as those on Wall Street saw the potential for greater gains to be made by selling more homes. So they started to make loans that were less and less sound. This culminated in the ultimate act of stupidity, the NINJA (No Income, No Job or Assets) mortgage. Of course, the inevitable chain of defaults began. All these mortgages were bundled into tradable instruments whose value, because of dubious rating practices, were completely opaque in there aggregated form. There was a period of hot-potato that ultimately resulted, like a game of musical chairs, with a series of firms caught in a vulnerable position. Currently, the government is proposing to buy these bad debt instruments because no one trusts the financial system. People don’t want to buy stock or bonds, and a few are probably considering stuffing their money into a mattress for fear that their bank will go belly up.

I suspect that the next couple decades will be interesting times. We will continue to try to reduce the effects of scarcity, while it remains our ever-present nemesis. We will want more, but we are likely to run up against some major barriers due to resource limitations, technical constraints, and the impact of the emerging economies’ development. 

In essence, we are a greedy and materialistic species, but I don’t mean that necessarily in the pejorative sense with which it comes across. The world as we know it is the result of our desire to have more and to live more comfortably. What would a world look like in which people were largely non-materialistic? It would probably look like some aboriginal societies that are still living what we might consider a pre-historic existence, and which too many of us feel we must bring indoor plumbing and electricity immediately. (By Emerson’s formulation, these people may not have advanced, but neither have they receded. I think it might behoove us to show a little respect, as the majority of our healthy and well-educated society couldn’t survive a month living as these people do - as masters of fire, water, food, and shelter.) Alternatively, such a society might look like Tibet before the Chinese invaded, which, by the way, probably looked a lot like Tibet 100 years before, and, had the Chinese not barged in, would probably look the same today. I am neither saying such people got it wrong because they are not as technologically advanced as the Western world, nor that the developed world is inherently evil because it has operated from a striving for ever more.  I am saying that, while materialism has a bad name, advances in health-care, science, philanthropy, technology, and our society, itself, are integrally linked to it. To decry materialism while advocating the need to spread modernity to the far flung reaches of the world is inherently nonsensical in my quasi-humble opinion.

So what of our next couple decades? We may experience distopia or utopia depending upon how events unfold. I believe the answer will hinge upon how we handle a number of problems for which we have only just begun to experience pain, but which could become much worse if managed poorly. First, we need to produce enough energy to meet world demand, but we cannot do it in just any old fashion. I don’t know to what degree global climate disruption truly exists or is a threat to humanity, but it does seem to me that, if there is even a low but significant probability of a catastrophic planetary disruption, that we would want to play it on the safe side and find a path forward that reduces carbon emissions.

Second, there are a number of huge nations that are in the process of becoming huge economies with all of the environmental and resource consumption ramifacations that arrive of that fact. The impact of Chinese and Indian demand on global petroleum prices has been frequently discussed, but it is not the sum total of the effect which these economies’ growth will have on the world. Of course, they will be increasing the global productive capacity and making consumers with the financial resources to consume, but it is in those areas in which resources are not easily substitutable and for which supplies are limited that the pinch will be felt.

Of course, there are countervailing forces as well. As emerging economies become more developed and urbanized, we can expect birth rates to drop. Thus, these societies will make gains from bringing their population growth rates down. However, the time scale over which that has a significant impact is not immediate. There may be other feedback cycles that will also have a positive influence, but the problems they must overcome are substantial.

A lot is riding on technology development and sound public policy (which does not necessarily mean painless public policy.) If we cannot keep expanding the global economy like a balloon, which only breifly and occasionally recedes in a recession, then we need to change our way of looking at the economy. We must realize that there are inevitable opportunity costs. For example, we cannot reduce global poverty without increasing energy  and other resource consumption. If we want electrification rates to be 100% globally and all the world to be linked into a global information infrastructure, we cannot ignore that there will be a trade off in resource consumption and waste production. If we are so constrained, we must not only think of expanding the pie, but of making each morsel count, to curb our averice, and to be innovative in how we think about development. If we can outpace such developments through technological development and favorable happenstance such as declining population growth rates, we still need to think about how to proceed in the immediate future.

b gourley