Economics is tricky. It’s an
old joke which I have used before, and I’ll use again, that if you ask 5
economists a question, you’ll get 6 different answers. There are several reasons
for this, and one of the main ones is that economics depends on people, and
people can be perverse, unpredictable, and just plain awkward.
But there are some
fundamentals to economics that are not too difficult to understand, but many (I’m
tempted to say most) simply do not. And the reason for this is that these principles
are in some ways opposed to common sense.
There are myths about economics
which you often hear people say, and I will try and explain here why the main
one is incorrect.
Myth: “You cannot continue
to have increasing economic growth in a world with finite resources.” Sounds
reasonable, but it is not.
First, let’s talk a little
about the magic mnemonic GDP (Gross Domestic Product). This is almost always
the number that is mentioned when economic activity or growth is discussed. Roughly
speaking it measures the amount of economic activity in a country. It does have
one quite large snag though: it doesn’t measure the ‘black economy’ – activity that
is under the radar because it is not recorded, and does not attract taxation.
The black economy can be anywhere between about 5% and 50%, or more. The
average is supposed to be about 13%, but this is a bit of a guestimate.
Also, GDP grows as inflation
grows, so this has to be taken into account to get a realistic figure.
In fact, it is usually the
rate of increase (or decrease) in GDP that is quoted – currently around 3% for
the UK, 7% for China, so the absolute GDP value is arguably of less interest.
So there are 3 separate ways
in which GDP grows (apart from inflation), the 3 steps to economic heaven J
1 1.
Increase in population
2 2.
Trade and Commerce
3 3.
Productivity and Technology
Let’s look at these in turn.
1. Obviously, if there are more people in a country, there is
likely to be more GDP. This is why GDP per head of population is often used to
compare economies, though of course it depends on what you are trying to
analyse. GDP of the US is around $16 trillion, that of China is around $8
trillion (2012), but China’s population is about four times that of the US, so
GDP per head in the US is around 8 times that in China. But there is (probably)
a limit on how many people can live in a country, so GDP growth by this means
is limited. Note that this kind of growth does imply an increase in the use of
resources – more people, more food, more energy, more goods.
2. This is the tricky one. Economics is not a Zero Sum Game. This
sounds technical, and it is a bit. It comes from something called Game Theory.
When I was about 16, I got a book out of the local library called ‘The Theory
of Games and Economic Behaviour’, by Von Neumann and Morgenstern. John Von
Neumann was a prolific mathematician and general mover and shaker. He did seminal
work in computing and quantum mechanics as well as game theory. The book was above
my technical abilities and determination – it was a big book, and I soon took
it back. Thankfully, there is a simpler way of putting this idea which many
people are familiar with – a Win Win. The point is that an economic transaction
can benefit both parties (individuals, companies, nations); so that both are
better off than before. This may not be obvious, so let’s have a look at a very
simple example.
Consider a small island with
2 men on it, separate from each other. The first man keeps chickens, and lives
on a diet of chickens and eggs. He has all he needs, and a surplus is no use to
him – he can’t keep it, and doesn’t need it. The second man grows corn. He
keeps a small surplus to plant next year.
Now one day they meet, and
arrange a trade of one chicken and a basket of eggs for a sack of corn. Both
are now better off, they have a much improved diet, and a way of using their
surplus. The essential point is that some things are worth more to some people
than others.
This has spawned huge global trades – just think of the silk
trade, the spice trade, the slave trade (OK, better not). It also depends on the
fact that some people are better at some things than others – also see next
section. From this small but powerful principle, global trade has brought
continued increases in GDP, along with:
3. One man with a horse can plough maybe an acre a day
(obviously depends on many factors). With a modern tractor, he can plough about
30 acres. That is an increase in productivity, and so one man can increase his
GDP by a factor of 30. The percentage of the population needed to farm has
shrunk from more than 50% to less than 1%. Productivity can increase without improvements
in technology, by improved learning, training, specialisation and organisation.
But technology is the ultimate driving force behind productivity improvement.
(Steam power, combustion engine, electricity, computing, internet).
So, that is a very brief
journey through the factors behind economic growth. The main point I am making
here is that growth can occur without increase in population or use of
resources.
Now it may be that we cannot
continue to have increases in trade and productivity indefinitely, although
that is a tricky question. Read Ray Kurzweil if you want to see why technology
can continue to increase as far as we can see.
It has been said that ‘Technology
has its own agenda’, which is to say that it will continue to increase whether
we intend it to or not. Its hard to stop. Once the genie is out of the bottle,
you can’t put it back (or Pandora’s box if you prefer). But it is simply
incorrect to assume that lack of resources will cause economic growth to cease.
