Economic Miracles are Simple
(Introduction to Economics, Lesson 19)
Turn on the news or read a newspaper or look at the news stories on the internet and you’ll quickly get the impression that our society is constantly battling economic problems of one kind or another. If we’re not in a recession or threatened by recession, then there’s a problem with inflation or a budget deficit or a problem with youth unemployment. Sometimes, a whole bunch of problems seem to be occurring at the same time.
Politicians keep promising to get the economy working properly but, unless you’ve been hiding in a cave for most of your life or are astronomically naive, you’ll realise that most politicians are actually almost entirely clueless as to how this can be achieved.
So, what is the secret of economic success? How can we all be immensely wealthy and incredibly well-off? There are many people — especially politicians — who like to propagate the idea that even we economists don’t know the answer to these questions. This, however, is a blatant lie! Any competent economist knows the answer. It is a simple answer — it’s just that politicians and many ordinary people just don’t want to listen to it.
I’m now going to tell you something which may come as rather a shock and which appears to run clean counter to the impression given by journalists and politicians alike. The secrets to economic success are not really mysterious or even remotely difficult to understand. There is, in fact, a very straightforward and obvious way to provide for immense economic success. This incredible weapon is known simply as, ‘investment.’
The concept of investment is very simple. Each year, we use our resources to provide essential products and services. We need clean water, we need food and we need shelter. Once we’ve provided for our essential needs, we still have lots of available resources left over. We could use all these resources to have a good time now. Or, we could use at least some of our spare resources to build a better tomorrow. In other words, we can consume our spare resources or we can invest them for the future.
Imagine a simple society from hundreds of years ago where villagers toil all day in the fields in order to scrape together enough to eat. If, by working hard all year, they manage to build up some stocks of food and drink, they could afford to take a few days off. Perhaps they could throw a little party — eat, drink and be merry until their supplies run out. It’ll be fun for a few days, but next year they’ll be no better off than they were this year.
Alternatively, they could use this opportunity to make some better tools, build some extra carts or bring some extra land under cultivation. Having ‘invested’ their time and efforts in this way, their work will be easier next year and they’ll have a bigger surplus. Then they’ll be able to afford to have a party and invest further for the future. The next year they’ll be even better off — and so on! It’s that simple!
You’ll notice that this sort of ‘investment’ doesn’t refer to ‘investing’ money. This sort of investment is far more important than that. This is real investment — the investment of real resources. When people today talk about ‘investment,’ they’re generally referring to ‘investing’ their money — putting their money into a bank, perhaps, in the hope of receiving interest payments. When proper economists talk about investment, however, they’re referring to something much more important — the allocation/investment of real resources to provide such things as capital equipment and infrastructure. We might also be referring to investments in people’s skills, improving our scientific understanding and advancing our technology.
If we want to be better off in future, the answer is simple: Waste fewer resources on present-day consumption and devote more resources to improving our infrastructure, updating our stock of capital equipment, improving our technology and educating our people. Then, each year, we can be better off than the year before. Use too many resources on excessive consumption, and we can easily become worse off with each year that goes by.
We just need to put enough resources aside so that our roads, railways, factories and houses are in a better condition at the end of each year than they were at the start. If we cut back on maintaining and upgrading our facilities, equipment and technology, then we’ve only got our stupid selves to blame if we find ourselves getting worse off rather than better off!