Friday, September 21, 2007

Economics: or why you don't have to eat the pizza box if there's no more pizza left

I liked how P.J. O'Rourke argues this point:

The hardest thing to understand about economics is that it doesn't need to be understood. My beatnik friends and I, when we were in college, were perfectly justified in expending out intellectual energy on sex and drugs instead of money. But there was one thing that we did need to learn. And still do. And it's a piece of knowledge that seems to contradict psychology, life experience, and the dictates of conscience: Economics is not zero sum. There is no fixed amount of wealth. That is, if you have too many slices of pizza, I don't have to eat the box. Your money does not cause my poverty. Refusal to believe this at the bottom of most bad economic thinking.

True, at any given moment, there is only so much wealth to go around. But wealth is based on productivity. Without productivity, there wouldn't be any economics, or any economic thinking, good or bad, or any pizza, or anything else. We would sit around and stare at rocks, and maybe have some for dinner.

Wealth is based on productivity, and productivity is expandable.Yet a person who worries about fairness can recite the old saw: "The rich get richer and the poor..." ....
"Get entertained by People magazine stories about divorces among the rich." No, that's not what he's going to say... "Get lower mortgage rates because banks have more money to lend." Nope, not it either. "Get better jobs because there's more capital to be invested in business." No, the cliche to end that sentence is, "The rich get richer, and the poor get poorer."

Except that is no evidence of this in recent history. Per-capita GDP is a tricky figure and doesn't tell us much about the well-being of individual people. But there are other statistics that don't present the same problems of averaging. Life-expectancy and infant-mortality rates do tell us how things are going for ordinary folks. No matter how rich a nation's elite, its members aren't going to live to be 250 years old and wildly skew the numbers. And a country can't fake a low infant-mortality rate by getting a few rich babies to live while letting all the poor babies to die.

P. J. O'Rourke: Eat the Rich, 1998, Picador Press, page 241.

It makes sense - people think that being rich means holding, for example, gold. But gold is only worth something if you can exchange it for something. If you're stuck on a small island with a huge bag of gold - and the other inhabitant has the water and food supplies, your gold is worthless unless you can exchange it with the other person. If he refuses to sell or give you water or food- you're dead. You can't eat gold and ergo if you can't exchange it, use it to buy something else, its worthless to you. A man can shut himself in a steel vault filled with tons of gold bars- but unless he can get out - he's in a fate similar to a stillborn baby.

Wealth is based on what you can trade with. Back in the hey days, a computer programmer could get paid megabucks because there was a limited number of people who could do computer programming and that was a skill in high demand. Back in the bad old days, when warfare was a constant everyday affair, the best warriors were highly valued. Weapons were in high demand. And ordinary people were at the mercy of soldiers. Not much to live for. Poor mortality rates. Not a healthy economy. Now, esp. here in western-civilized societies, we have peace and order, people don't have to worry about wars or kings who come and confiscate your property and women. People can trade and barter in a roughly fair environment. And productivity can grow and wealth increase.

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