Where do we start?

Imagine the economy is like a car engine.  You know the names of some of the main parts, and like to think you basically know what they do, but faced with all its complicated messiness you’d be lost.

In last week’s post I showed you some data (courtesy of Professor Steve Keen) that would seem to indicate that this engine could easily blow.  What I’m going to do from next week is take the engine apart piece by piece, so that we can have a really close look at the components and then put it back together with much greater understanding of how it works.  (This is going to take quite a few weeks, so we’ll see if I then lose all my readers!)

But this week, I just want to point out a couple of the main bits of the engine, so you can see the bigger picture before we get stuck into the detail.

If we want to meet everyone’s basic needs on the planet, then we’re interested in how much the economy can produce – its productive capacity, or productivity.  One thing to note is that productivity depends solely on what all the working people currently produce:  all those who aren’t working (e.g. retired people, or children not caught up in child-labour) are dependent for their survival on the output of those who are.

Just like a car engine needs regular servicing, productivity needs attention – machines need to be repaired, factories maintained, and new generations trained.  And productivity is always improving – we’re always innovating, finding new ways to do things, and becoming more efficient.  So that means new machines, new processes, a need to update skills even for experienced staff.

Maintaining and improving productivity requires investment.  Businesses can’t use all their resources to produce the maximum amount possible this year, they have to think about maintaining and improving all their equipment, their know-how etc.  There’s a trade-off in business expenditure between maximising output today and increasing potential output in the future.

Now let’s say that the world can’t produce enough for everyone right now, but with a bit of effort we could be producing enough next year.  Then we want to take the steps to be able to increase our productivity.  And even if we can produce enough right now, we want to be able to produce it with less damage to the environment.  And we want to produce it without people having to work 70 hour weeks for a dollar a day, or in conditions so bad that factories have to put up suicide nets to stop people jumping (yes, really).

So what all this adds up to is that as well as being interested in what we produce right now, we’re interested in what we’re going to able to produce next year, and in ten years time, and in fifty years time.  And we’re interested in being able to produce it more efficiently.  Hey, if we can reach a stage in which we can produce enough to meet everyone’s needs, without environmental destruction, and with everyone only working 25 hours a week, then happy days!

In other words, we’re really interested in investment that enables us to increase productivity in the future.

Okay, let’s think about your future – when you retire.  Say you have a pension plan, and right now you’re paying out of your wages into it every month in the hope that you can have a decent standard of living in your old-age.  No matter how much you’ve saved up, your standard of living will depend on what the working age population in that future can produce.  We’re back to productivity again – your level of savings just determines what share of that production you get.  If the number of people retiring is growing much faster than the working population (because we’re all living longer), then there will be less productivity to go around.  It’s the same if you’ve saved nothing, and live off a state pension – your well-being will depend entirely on what that future economy is able to produce.

So we all have a massive interest in worrying about the productivity of the future society – when you’re retired and your kids are working.  Even if you’ve already retired, you could live for another 30 years, so don’t start getting cocky and say this doesn’t apply to you! .

What this boils down to is, when you think about it, you want your pension funds to be used in ways that guarantee future productivity.  It makes sense for all these billions of pounds being diligently saved by people all over the world to be used in ways that contribute to future productivity through investment.  (And linking this to last week’s post – investing in the stock market doesn’t improve productivity, it just inflates the price of shares – but we’ll come back to this in more detail in future weeks.)  So saving is something that is critically important to look at, and we’re going to spend a lot of time looking at it!  (It’s important that we come to understand saving and how it operates in the economy, because the economics text books sure as hell don’t.)

The same applies to investment in public services, using your taxes and national insurance contributions (in the UK).  Right now your taxes help pay for state pensions and services for the elderly, and when you retire you’ll expect the same:  if you had a vision of your future and found out that you were going to end up unable to look after yourself, living in a care home, you would damn well want to make sure society still has well-run old people’s homes, with well-trained, motivated staff who are paid enough to keep them there.  But if that future society is in a massive recession, maybe its services for older people will get cut.  So you need to ensure that Government expenditure, as well as your pension funds, are helping create a society that will be able to meet everyone’s needs in the future, to ensure that your needs get met too.

If we’re interested in producing enough for everyone, these are some of the components of the economy that we have to understand.  We’re going to start next week using a very simplified model of the economy that enables us to think about saving.  Over the weeks, the model will get more complex as we add in the other components, and gain insight into what they all do.  And by the end, hopefully you can step back from engine and see how it all works.

(I’ve no idea if I’m capable of writing this well enough, by the way.  The act of writing is forcing me to be clearer in my mind on these concepts, and hopefully through questions and comment you can help me hone my thoughts, and this blog will evolve into something that is instructive and useful.)

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