I am not an economist. Truth be told, I only took one class in economics as an undergrad. However, I’ve learned a lot in the past few years, and one of the things I’ve learned is that most people don’t understand economics.
Pascal-Emmanuel Gobry knows this as well, and explains it far better than I could. In today’s Forbes, Gobry breaks down the understanding of economics into two broad camps: the “productivist” view and the “creativist.” First, the productivist:
Violently compressed, the productivist view of the economy holds that an economy works because it gives people stuff to do and stuff to buy. The reason why an economy which hums along hums along is because it produces enough stuff and people have enough money to buy that stuff so that people buy stuff and that gives jobs to the people who produce stuff, and in turn the stuff that is produced makes people want to buy them. To the productivists, the key thing is to keep the machine running and, hopefully, make it run faster, and more efficiently. But, fundamentally, what makes the economy run is this consumerist dynamic.
This, Gobry says, is the way most people – even economists – understand economics. It’s right in the short-term, but flawed. This viewpoint holds that economics is merely an endless cycle of buying and selling. As long as there is products are made, bought and sold, everything should be okay.
But it isn’t. And that’s why the productivist view is wrong.
What’s the other viewpoint? The creativist view:
In the long run, it is absolutely clear that what creates economic prosperity is human creativity. Economic models, which have almost no predictive ability as it is, are even more utterly useless here: it’s very easy to model a productivist economy, and probably impossible to model a creativist one, so guess what academic economists who want to publish papers with lots of equations do? If you look at the history of the Industrial Revolution, it is absolutely clear that what drove the Industrial Revolution was good old fashioned innovation: the pin factory; the steam engine; the mechanical loom; and so on. You can’t model that on a spreadsheet, but it’s the fundamental truth.
You see, economics is about people: what they do, how they do it, how they improve upon old ways of doing things. Instead of a cycle of buying and selling, economics is an endless array of human creativity and the drive to do and be more.
Now, the creativist view comes at a cost. You see, in the productivist way of thinking, one could simply keep making and selling the same things, for instance, electric fans to cool one’s house. Your fan wears out, and you buy a new one. That one breaks, and you purchase a new one, and so on.
But what happens when someone invents the air conditioner? More people start buying air conditioners and less fans. Some of the folks who make fans are going to lose their jobs, and those jobs won’t come back. Now, we could pour government funds into fan factories to make sure those folks don’t lose their jobs, but is that really the solution? This loss of one type of work or industry for another is called creative destruction, and it isn’t pretty or easy. It is, however, necessary for economic growth. Fr. Robert Sirico, in his book Defending the Free Market: The Moral Case for a Free Economy, addresses this issue.
The challenge for all who are concerned with promoting a free and virtuous society is to minimize the damage done to people by the economy’s dynamism without suppressing that dynamism by wrapping business in a regulatory straitjacket. Sure, we could protect obsolete industries. But are you really protecting a person’s dignity by enticing him to continue making an obsolete product? How would you like to look back on ten or twenty years of labor and know that it wasn’t genuinely profitable but persisted only because your industry or business was on the public dole?
The problem goes beyond the loss of personal dignity. Every time resources are used to prop up an obsolete industry or inefficient company, those are resources that cannot be used to fuel profitable and sustainable industries and businesses. The more resources an economy routes into inefficient and obsolete industries and businesses, the less economic growth there is for the economy as a whole. If labor and skills are not allowed to shift from sector to sector to find their most highly valued use, then economic stagnation is the inevitable result.
If economics were simply a matter of shifting money around, the productivist view would be fine. But economics is about people: their creativity, need to innovate, to have dignified work, to learn and grow, and not simply money. And that is what most people get wrong about economics.
Read “This Is The Fundamental Thing That Most People, Including Paul Krugman, Don’t Get About Economics” at Forbes.