We are going into our fourth year of recession. We have a bumpy road still ahead of us. And we have no promise of ever again seeing the sort of economic growth and prosperity that seemed to be America’s birthright in the late 20th century. In the Great Recession—as in the Great Depression before this—many people today are adopting the notion that acquiring wealth and property constitutes a kind of theft. One person’s wealth robs others of the chance to make a bare living. If I am rich, then I have made you and others like you poor. What one consumes another cannot have. This notion derives from the analogy of the national economy as a great pie. And it’s simply a false analogy.1
For one thing, a pie is static. So much exists, to be cut into so many slices, thick or thin, and then it’s gone. Pie is a zero-sum commodity. As noted in my previous blog, an economy is not a physical object. It’s a dynamic condition, a pattern of interchange between one person and another, among people and corporations and institutions. It isn’t a “thing,” at all.
Let’s, however, for a moment, consider that the economy might be a thing. If so, where did it come from? Is it the land? There is only so much land on Earth, and only a small fraction of that is immediately useful. So if I own land and you don’t, am I therefore rich and you poor, and does my ownership deprive you of a living? That proposition might work in a simple farming situation. I got the good bottomland with rich soil and plentiful water, yielding good crops and making me rich. You got the parcel with sand and rocks far from any water source. But as thrifty, scientific farmers have shown in many situations, even poor land can be made to yield with the right application of human energy and creativity. Think of Israel, northern Utah, or eastern Washington. Land left to itself just lies there.
If the economy were a thing, would it be natural resources? Certainly, nations with plentiful timber, oil and gas, and metal ores have become wealthy. As energy and raw materials, these God-given resources are the starting point for many economic transactions.2 If I own land bearing these riches, I can become rich. If you own land with no resources, you might remain poor. But just like the land, resources left to themselves just sit there. The Middle East lay above an ocean of oil and remained poor for generations because no one knew how to drill for it, or finding it on the surface, how to use it. The same could be said for western Pennsylvania or the Los Angeles basin.
Land and resources are the stuff upon which an economy can do its work, just as grain is the stuff that a miller grinds. But the grain is not the grinding, and raw materials do not automatically make themselves into wealth.
Is an economy then the mines and factories, the tools of production? Now we’re getting close. If I own a factory, I can become wealthy. If you work in my factory, you might have a living, although I can see to it—through controlling your hours and wages—that you remain on the edge of poverty. But there are many factories across our landscape that became idle and were boarded up. They made goods that people no longer wanted, or made them inefficiently, or made them less efficiently than factories elsewhere. Factories and machines are no more an economy than land and materials. They are a means to the activity, not the activity itself.
So, is the economy the money flowing through it? We value everything in dollar units—land and houses, commodities, shares of stock representing ownership of factories and machines. And certainly, if I have a dollar, that’s a bill or coin you don’t have. But money is just a marker, a tally, recording the transaction. Money is a chip of wood floating on the river that shows you how fast the water is flowing. And money certainly is not finite. As we’ve discovered in the age of electronic banking and stock markets, money isn’t metal disks and printed paper—those are just physical reminders. Instead, money exists in our heads and in our computers. Money is created when an asset such as a share of Apple stock or a house in Palo Alto gains value because someone else sees it as desirable and will pay more for it than the value I see in holding onto it. Money is destroyed when someone else later sees that asset as less desirable and won’t match the money I paid out to acquire it.3
The economy is the activity that finds a use for the land, the materials, the machines of production. Money is the lubrication that raises that activity above the level of simple barter.4 Other people and their demand for food, goods and services, energy and housing, make it worthwhile for the farmer to plant another acre, the miner to dig another ton of ore, the factory owner to add another machine line, the developer to extend a suburb. Without demand, these things don’t happen.
Where does demand come from? As noted in my previous blog, demand comes from productive activity. If I have a job and earn money, I have the means to satisfy my needs for food, clothing, and shelter, my desire for transportation, fashion, education, and amusement, and anything else my store of value allows. If I don’t have a job—a place in the economy—I may have wants, needs, and desires, but they don’t become economic demand.
The proper analogy for an economy is an ecology. In a rich ecology, like a tide pool or a rainforest, sunlight is captured, used, and reused at many levels. Plants absorb it and grow carbohydrates. Animals eat them and produce proteins. Food chains develop with expanding niches for more animals and plants. Opportunists thrive, like the bacteria that process rotting vegetation and animal wastes. Life increases. Life makes more life. In a poor ecology, like a desert, sunlight falls without effect—only making the sand hot. Less energy is captured and traded. Niches disappear or become fiercely competitive. Life decreases. Absence of life diminishes life.
In this analogy, an economy with free markets, a robust system of banking and capital, and wide-open trading—like America’s—is a rain forest. An economy with tightly controlled markets, closely held capital, and narrowly defined trading opportunities—like Soviet Russia’s—is a desert.
But you might object that the ecology is driven by a free natural resource: sunlight. Without the sun, life ceases in either the rainforest or the desert. Where is the comparable free resource in an economy? And I answer that the free resource is human energy, creativity, and ambition. We humans want to make things. We want to define and create meaning for ourselves and our chosen group. Some will invent new products, new systems of production, and new ways of thinking that open new courses of action. Others will use their energy and ambition to make those products and follow those new paths. That’s human nature shaped by a million years of evolution.
In a free-market economy that rewards creativity and ambition, human energy is captured, used, and reused. People are able not only to secure the food, clothing, and shelter that they need but to indulge in tastes and pleasures beyond the bare necessities, or to save and invest in ways that increase their future potential. These activities create opportunities not just for the farmer, the weaver, and the carpenter, but also for the gourmet chef, the fashion designer, the cinematographer, the artist and writer, the banker and broker. Activity begets activity, and wealth creates wealth.
In a closed, command-and-control economy that ignores creativity and ambition—except for a chosen class of state bureaucrats entrusted with society’s future—the focus becomes mere survival. All the rest is sunlight falling on sand. It starts with the drive to equitably provide the basics of life to passive citizens, but people without the opportunity to dream and expand their lives meaningfully will sink into boredom, alcoholism, and mischief. Economic activity declines. Eventually the struggle over crusts consumes all human energy, like scorpions grappling in the desert.
Human nature was not designed by evolution to be static. We are not things, but dynamic beings. And we cannot be baked into a pie.
1. I wrote on this subject before, in It Isn’t a Pie from October 3, 2010. It appears to be time to expand and explain the substitute metaphor.
2. “God,” in this sentence, is a kind of shorthand, not a sign of my devotion. The deity stands as proxy for many fortuitous situations that occurred once and will not be repeated: forests of strong oak and soaring redwoods—resistant to pests and perfect for building—found along the West Coast; pools of oil and domes of gas found under ancient seabeds; veins of gold running among the granite; fields of iron oxide lying close beneath the clay. Use them once and they’re gone. The gifts of weather and soil, fossil sea life, or good geology.
3. And money also simply grows or decays over time. If my money in the bank is loaned out to build homes and factories or buy productive land, and later paid back with interest, it grows. If my dollar bills stay under the mattress, the rate of inflation makes them worth less every year.
4. Without money, the miner has to trade a bucket of ore to the farmer for an apple to eat, and the farmer has to collect a lot of buckets and then give them to the factory owner to get the tractor he needs. Money makes things go faster.