What is an ‘Economy’?

I have taken a couple of ‘pass courses’ in economics, so you can assume I know nothing. I read Noam Chomsky, who clearly said that the supply and demand versus price curves taught in Economics 101 are simply, er, crap. So now you may assume I’m alert enough to ask the odd dumb question, and think about it. These are my thoughts on Economy and GDP, among other things.

For the primary insight I am indebted to Rebecca Moershall, who probably does not remember the conversation. She was raised in Amana, a closed commune of people in the USA. Before Amana was combined with Whirlpool and Maytag (and others) it was also a premium brand of large appliances: fridges, stoves, washers, driers.

The commune consisted of six villages in a few-miles circle surrounded by 250,000 acres of farmland. Rebecca considered that she, as a child, owned it all. Everything was done by community effort, with few exceptions. To get things they could not easily make, they started the Amana line of appliances. From this manufacturing they earned cash.

Sometimes a tricky system can be understood by looking at a simpler one that accomplishes many of the same things. It’s like looking at the ecosystem in the Galapagos Islands: there are so few moving parts, you can actually figure some of it out. I propose to use a thought experiment, a community like Amana, to think through what GDP and an economy really are.

“More” in Amana means, more children, more crops, a new barn, a new house. To build, trees are cut, planks are sawn, pegs and holes are fashioned, nails made or acquired, and labour applied until the job is done. If GDP were measured in successful running households, a new house and barn would be an increase.

If you need a haircut, maybe a family member or a friend does it for you. Maybe you trade that service for milking a cow or watching a toddler during hay season. In Amana this does not involve money, and does not involve construction, so it does not “add to GDP.” In a money economy, cash or equivalent would be exchanged and GDP would reflect this.

In Amana, you can borrow only against future expected help. In a money economy, you can borrow at the bank and outbid your neighbour at an auction; doubly ironic when his cash deposit is part of the bank’s reserve against your loan. A money economy can often create apparent wealth ‘out of thin air’, and allow purchases to be made with it. Those countries now crashing in the Euro-zone know well how this is done, as do Germany and the other banker-exporter nations. The USA is in this boat too, as it must raise its debt ceiling, and somehow keep its credit rating, and somehow keep its freely-printed bonds selling abroad. ‘Quantitative Easing’ is where the Fed prints money and itself buys bonds the US Government prints. It is literally cash out of thin air. In theory, it should devalue all existing cash and cash equivalents, causing inflation.

The value of gold and diamonds deserves some discussion. For a bit of fun, I am going to relate from memory a story about coco de mer. This very large seed would show up from time to time in Europe. It was mythologized to be from an underwater tree. It was rare and potentially very valuable. When a Spanish ship returned from theĀ Seychelles with a hold full of these nuts, it was estimated that, had the treasure been kept quiet and sold one at a time, the Spanish nation’s fortunes could have been recovered. Instead, the word got out and the value of the huge nut crashed. I mention this because, other than decoration or possibly food, there is not much inherent value in a nut you can’t grow into a tree in your climate. Yet its value was, temporarily, quite high.

Back to gold. Imagine a Spanish ship returning from the Americas laden with (stolen) Inca gold (and silver and whoever else’s precious metal they could get). Suddenly Spain is in good shape. Why is this? Because other countries, and internal interests, will offer money and goods and services in exchange for this gold. Please note that nothing extra is actually produced in Spain: no planks sawn. Except for the gold made into jewellery, it is merely a representation of value. Value is, of course, a myth made true by the actions of people who believe it. So, in an international sense, Spain was able to pull real things into its borders by exchanging this ‘medium’ with outside suppliers. Overall, the only real increase in world GDP occurred where those suppliers made things they would not have made otherwise.

So, what is an economy? There are at many views:

  • what is made in the country, including food, shelter, clothing.
  • above, plus what immediately permits or assists: roads electricity police protection.
  • above, plus services traded for it. Concert singers. Hair cutters. Doctors. Teachers.
  • above, plus add-ons created by laws and contracts: lawyers, politicians, lobbyists.
  • above, plus extraction bonuses coming from oil, gold, diamonds, etc.
  • every purchase made inside the borders.

Since the latter includes credit and trade deficits, I conclude that a modern economy with surging GDP is likely to end up in a debt crisis: personal debt, business debt, and government debt.

Conclusion: the Amana view of an economy may be more realistic than ours, of borrowing, importing, and measuring GDP. Debt with interest is a formula for disaster, when that debt keeps increasing. Outsourcing increases trade deficit and country debt. Amana ‘in-sourced’ the appliances in order to ‘outsource’ tricky bits of metal. North America can only in-source resources (Canada) and paper debt (USA).

Now what? Vote, lobby, blog, call, eMail anyone you can move even incrementally to get all of us out of this debt trap. When our lights go off, the rich will have generators.

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