Economics is incredibly complicated, we are told.
Economists would have us believe so because, otherwise, why would we need
them? Politicians likewise prefer befuddled voters as they are easy to
manipulate. Our economic system is indeed complex because of its enormous
scale. But it is based on some very simple principles, and we can use
them to understand fundamental relationships.
In case you hadn’t noticed, the global economy is in a
funk. Investors aren’t investing, bankers
aren’t lending, consumers aren’t consuming, manufacturers aren’t
hiring... what to do?
There is a debate raging on the choice between growth or
austerity (reducing debt) to improve things. By “growth”, its proponents mean public
sector spending (hiring more cops, clerks, and teachers), funded by higher
taxes or increased borrowing. Those on the other side say that austerity works
just fine, thank you very much, it just takes a little longer. And
further, they argue, “growth” could and should be nurtured in the private
sector – it need not be a codeword for public spending.
Public sector, private sector, spending, growth, debt,
taxes… it’s enough to make your head spin. What should we do? How
do we decide?
Let’s take a look at how economics began. Imagine a
prehistoric tribe made up of ten individuals. We will focus on the adults
and ignore the children for now. The adults are divvied up as
follows:
- 3 hunters
- 4 gatherers
- 1 shaman (active)
- 1 shaman (retired)
- 1 hunter (disabled)
The three hunters, as you might guess, track, pursue, and take
game animals, large and small. The four gatherers
cultivate simple grains and vegetables and collect wild fruits and berries. The
hunters and gatherers make up the private sector, as they produce the means to
keep the tribe alive. Their output feeds the entire tribe.
The shaman uses magic to forecast the future, cast spells on
the tribe’s enemies, and teaches basic skills to the tribe’s children. He makes up the public sector.
The disabled hunter, unfortunately, is no longer able to contribute
because of a badly wrenched back from trying to haul a large elk. The retired shaman, too old to prognosticate,
and the disabled hunter are social beneficiaries.
All of the grains, berries, rabbits and venison produced by
the hunters and gatherers must be shared with the public sector (current shaman)
and the social beneficiaries (retired shaman and disabled hunter). Every rabbit, sheave of grain, and basket of
berries must be shared ten ways, even though only seven are responsible for
production. For every 10 rabbits a hunter snares, he must give up 3 to support
the public and social beneficiary sectors. This is a tax.
Imagine that a prolonged drought results in poor yields for
both hunters and gatherers… the economy is a mess. People are hungry, starving, and something
must be done. So what is the logical
conclusion… shall we hire another shaman from the tribe in the next valley?
That’s what some argue… that by expanding our public sector, economic output will be increased. But we still have only 3 hunters and 4 gatherers, who must now share their output 11 ways instead of 10. They are rightfully baffled by this decision, because there are now more mouths to feed but no increase in production to do so.
That’s what some argue… that by expanding our public sector, economic output will be increased. But we still have only 3 hunters and 4 gatherers, who must now share their output 11 ways instead of 10. They are rightfully baffled by this decision, because there are now more mouths to feed but no increase in production to do so.
Does this mean that the public sector is bad and that we
shouldn’t support those in need? Absolutely
not! In our real economy, public servants
are crucial to our society’s functioning, keeping us safe from crime, putting
out fires, and teaching the next generation of productive citizens. And it is only decent to sustain those who
are truly in need. But remember that we
can only do what we can afford to do.
That is the mistake made by the Greeks – chronic overpromising, living
beyond their means.
When the government expands the public sector or expands
social benefits, these costs must be paid.
There are only two choices… by raising taxes now or raising taxes
later. In the latter case, we can borrow
a surplus from the tribe in the next valley, but it must eventually be repaid
(plus interest), which requires a future tax.
This is not meant to convince you to think in any given way,
only to think. When presented with economic alternatives, think. Then choose. But do so based on an informed consideration.
Hello from your "little once again" brother... I lost 60 pounds! YAY!
ReplyDeleteI like this article, Irwin. I like how you hit points people don't want to talk about.
I wrote an article "Shopping In Tough Times" last year
( http://voices.yahoo.com/shopping-tough-times-part-1-7806684.html )
that was plagiarized at least 15 times. (Seriously. Here is my report about it on my blog:
http://plagiarismofmywork.blogspot.mx/ )
It merely tells of ways to reduce shopping and car care bills.
We must do all we can do to affect change and security within our households.
A very sane and rational explanation. I won't be holding my breath expecting politicians to have an equally sane and rational debate...
ReplyDeleteIrwin for President !! Very logical , very pragmatic , one can only hope and pray the masses will see this blog and come to a sound logical conclusion in November !
ReplyDelete