What Is The Economy?

“Adam Smith said ‘wealth is the lifeblood of nations’,” said someone in the mediocre sci-fi Civilisation spin-off Beyond Earth.

For the longest time, I thought ‘the economy’ was just something clean-shaven suits made up to sound important. To me, the words ‘wealth’, ‘money’ and ‘the economy’ were just synonyms for ‘bastard’. I thought a ‘market’ was just a place to get cheap veg.

Why not just change the value of money so everyone could be rich? Simple, eh? I blamed snobs in palace compounds for squirrelling it away. I thought money was zero sum. I believed there was a finite amount of wealth (read: good) in the world hoarded by greedy capitalists.

It’s a grim view. Yet it spawns romantic heroes like Robin Hood.

But is it true? Is the economy just an endless war over scarce resources? Is it the snake eating itself? Or, is it a positive sum: the more wealth there is, the more wealth it makes? Does the snake instead give birth to baby snakes?

How do economists think?

I’ve always found the idea of Homo Economicus bizarre: economists see humans as self-absorbed ‘rational actors’ sifting through all the options to make optimal financial choices.

This is patently absurd. Don’t lie to yourself. Humans aren’t rational; they probably don’t even have free will. We’ve all splashed out on frivolous things. We hate filling in forms. Human beings act on whim. En masse, they act like morons. Homo Economicus, my arsius.

But, no matter how much the young me believed it, the economy isn’t made up. It isn’t just a word boring people use.

Unlike energy, wealth can be created. It can be destroyed. The economy is that churn. And that’s what baffles me the most: stock prices surge up and down; people go on panic buying sprees – why? Because they feel like it.

Is it all about the money?

I’ve been slinging around words like ‘money’, ‘wealth’ and ‘the economy’ as if they are all the same thing – as if I understood them myself. I don’t. But I don’t think economists do either. Economics is not a hard science, yet there is a method to its madness.

Economics is about resources. Money is a token that represents those resources, so we don’t have to swap pencils for potatoes. Bartering is probably something hipsters are into, it probably makes you woke. But, it’s no way to live. Money is probably here to stay.

A resource can be anything: a cow, a property, time, effort, money, labour, and even your attention. Economics studies the production, distribution and consumption of goods and services. I got a lot of joy listening to the audiobook of The Wealth of Nations: the reader listed hundreds of sheep, cows and horses and how their relative prices waxed and waned depending on their scarcity or abundance.

Economics isn’t about money. It’s about people and the things we want and need. As 19th century economist Alfred Marshall said, “Economics is a study of mankind in the ordinary business of life”.

What are the big theories?

Adam Smith

Adam Smith

You hear people banter over terms like “planned economy” and “free markets” – both of which are loaded terms and, when you mention either at a dinner party or when having a few drinks with your workmates, you’ll soon find that many people have strong opinions.

People tend to glow red if you mention one of them in a remotely positive light.

But what are they? The history of economics rests on the backs of three big thinkers: the clean-shaven Adam Smith, the moustachioed John Maynard Keynes, and the scraggy-bearded Karl Marx.

John Maynard Keynes

John Maynard Keynes

Adam Smith’s theories appeared amid the Enlightenment: the important time in human history where we threw off the shackles of religion and monarchy and started using reason. Economies were no longer at the mercy of monarchs bankrupting the state for their sexy parties. It’s all about liberty. It’s where we get the idea of free trade and free markets.

KArl Marx

KArl Marx

John Maynard Keynes tried to counter the excesses of capitalism. We all know free markets and big business can go off the rails and not function in the best interests of humanity. So, Keynesian economics is all about clever government intervention (or that’s the idea anyway).

Karl Marx: this guy’s not a fan of free markets at all. He sees the economy as a constant struggle between the haves and have-nots – the oppressors and the oppressed. This is known as “class struggle”. He advocates a ‘planned economy’ where instead of companies the government is in control of factories, farms and smoothie shops.

Are any of these correct? Possibly. Economics argue over these and a raft of other theories derived from areas like maths and evolutionary psychology – including sexy and commonly misunderstood ideas like game theory.

Why do people argue so passionately about it?

Money matters. People like having stuff. When they don’t get stuff, they get pissed off. Or, they get pissed off on behalf of someone else who doesn’t have stuff. Or they are proud of how hard they have worked for their stuff and don’t want to give it away to people who might misuse it. All reasonable things to be annoyed about.

On all sides of the political spectrum, people worry about fairness (see Jonathan Haidt’s The Righteous Mind). Some worry about inequality, others worry about people getting stuff for free. Ultimately, everyone wants the world to be a fairer place. They just don’t agree on what “fair” means. I think they all have a point. But, y’know, life isn’t fair.

And then there’s elections and the Brexit referendum. The ‘economy’ is used as a means of fear to threaten people into voting for this political party or that. Nothing annoys me more than tactics like this.

Again, grim. Especially for a topic so packed with intrigue.

What’s the worst thing that could go wrong?

No-one wants a repeat of the Weimar Republic. I don’t want to have to ferry my money around in wheelbarrows. We don’t want the government assigning jobs. But we don’t want douchebags who add no value to society getting paid fat ol’ bonuses.

Trying to pretend economies don’t exist (I’m looking at you Karl Marx) doesn’t work. Pretending that all problems are solved by the wizardry of market forces is also poppycock. The first led to the gulags, the second leads to recessions and widespread corruption (don’t pretend it’s not true, LIBOR).

Perhaps we could agree to disagree. And find a compromise, eh?

How should we shape it in the future?

Cyberpunk like Robocop or Altered Carbon depict a future in which the world is owned by mega corporations. Dystopias like 1984 or Brave New World show us societies where people get a quota of food, luxuries and love.

Does it have to be a hell run by megacorporations or IngSoc? I doubt it. From everything we’ve learnt from evolutionary psychology, we know that humans aren’t rational actors; we also know humans don’t work well in large groups (yes, that’s you, corporations and governments). We evolved to live in communities of 150-250 people, a figure known as Dunbar’s number.

Perhaps that’s the way we should build our companies, societies and economies: in small manageable chunks. Small companies, small societies, manageable economies. Let’s browbeat our economic experts to build the economy for us. Not the economy they read about in their favourite text book.

Remember, the economy is all about people.

How about Financial Speculation?

The more I speculate on the topic of the economy, the more I want to know. It’s real. But it’s not about dry clean-shaven men in suits muttering about stock prices: it’s about human beings; it’s about our wants, needs and desires. 

I doubt we’ll transcend the need for money and live in perfect harmony with nature. I doubt market competition is the cure for all ills. I do believe human ingenuity is the one thing that can make our future economy better than it’s ever been. We all wanna be rich, right?

No matter how much we resist it. You and I are part of the economy. It belongs to us. It’s our job to make it into something better.

But I won’t be speculating on the stock market any time soon. That’s just posh gambling.