First Principles Thinking About the Economy

Many of these are not original but as I think about what is true in an economic system I come up with these points.

  • The economy is work. In order for us to consume tomorrow what we consume today someone has to work tomorrow.
  • Wealth in the world is:
  • The debt of another
  • The value of an asset
  • Money printed by the government

Having more people in debt doesn’t help the world and having the world’s assets cost more labor hours isn’t necessarily helpful either.  A revenue producing asset doesn’t make the world wealthier, that is someone else’s future labor owed to you.  The world doesn’t get richer or poorer via numbers in bank accounts.  The governments printing a bunch of money doesn’t make us richer or poorer.  Wealth is increased by learning, processes, and the production of hard assets like infrastructure.  Limited resources being decreased makes the world poorer.

  • The economy only knows who is spending, not who is saving or what incomes are.  The production of society is determined by spenders.  If one entity such as governments keeps borrowing and one entity such as the rich keep saving the economy doesn’t change until that stops. Only then will the economy and what it produces shift (less products per labor hour for others).
  • The economy can always produce tomorrow what it produces today barring a non-economic disaster or event.  There is no fear that we can’t have tomorrow what we have today because there is more debt in the world.  More debt means more people are owed as well and the governments can tax how they want.  The economy becomes better over time.
    • For example, after a war when the government is in a lot of debt there is really no reason the world is less rich than before the war.  The government can use taxes and inflation to take out debts. 
  • In an austerity environment it is not enough for those in debt to work more, those that are owed must spend more than they are bringing in to create less leverage in the ecosystem.  Otherwise the economy shrinks.  The rich have less customers during austerity unless they are the customer.
  • If the government chooses to borrow over tax, the lender does not become richer.  They trade in $100 for a $100 bond that usually slightly beats inflation. The government (everyone) is $100 poorer and the person not taxed is $100 richer.
  • Society is not richer if a $100/year revenue stream trades for $1000 today and then $2000 tomorrow. Now it is harder for the next guy to get a return on investment.  We are not richer if property values go up, a burden is placed on the next in line to work more for a dwelling.
  • If you can’t spend money you don’t have it.  You hiding $1 million in a secret account and the government printing $1 million is the same as the government taxing you $1 million.
  • The more people trading in assets for labor the greater the burden on labor.

Personal Views also Shared by Many

  • The economy and its currency serve the people and their values.  The people do not have an obligation to serve an economic system as if it were a religion.  Rewarding hard work, risk, and innovation are eternal human values.  So are goodwill to those in need, sustainability, a force for good in the world, and being a counter to wealth accumulation at the top.
  • The government must have the levers and ability needed for large expenditures such as a war, housing crisis, virus outbreak, or environmental threat including the power to print money and tax.
  • The growth of the economy such as improvements to processes, technologies and infrastructure is work done by all but not shared by all.  Large incomes and stock prices outpacing economic growth isn’t a religious phenomenon, it is the wages not rising that allow it.  The government and its tax system is the natural counter.
  • The cornerstone of implementing values and serving the needs of the people is the government, our political discussions and its tax system. 
  • It is not wise for any sovereign entity to owe debts it cannot pay in a realistic amount of time.  This is not good for anyone.
  • It is not good for anyone to have an entity setup to fail.  Others should engage their brains in goodwill in that case.
  • Competition is a means to motivate but not the only means to motivate a group to work hard and innovate.
  • Rewarding risk and innovation is great but there is a lot of wealth created from passive investment, and continual upward trajectory of executive compensation that is more managerial in nature.  Even if you do innovate and become wealthy, usually that’s at the expense of the market share of someone else and on the shoulders of those that have come before you.
  • Recently some ideas have come out from goodwill economists about modern monetary theory, the idea that we don’t have to worry about deficits because the government can print money.  While this is true, it is attempting to skirt pay for discussions on items of goodwill.  If we are going to spend $1 trillion in labor on senior income somebody has to work to create the $1 trillion in goods and services to be consumed.  The government does have to make someone poorer eventually through taxation or inflation.  It is perhaps better to just stand with your feet planted on values and cold hard truths.
  • Even if you are rich it is better to set the system up so the needs of all are taken care of through political argument, not the groveling of the needy at the hands of the rich hoping for goodwill.