Posting in Cities
Why do economies succeed, why do they fail and how do we profit in the days ahead. Craig Thomas, a veteran private-sector economist and author of The Econosphere joins us to answer these questions and help us think differently about our social world and how it works.
The economy. It’s all folks seem to talk about. At the same how many of us really understand its inner workings? Why do economies succeed? Why do they fail and what’s the best way to heal a failing economy? These are the questions that Craig Thomas addresses in his new book, The Econosphere. Thomas is veteran private-sector economist with deep experience within firms like Citigroup, where he served as research director for Citi Property Investors and specialized in regional, macro and real estate economics. Thomas is well known for his ability to explain complex theory in an entertaining way.
Craig, welcome to Smart Planet, what’s the difference between the economy and the Econosphere?
I’m pleased to respond that there is absolutely no difference between the economy and the Econosphere.
Shakespeare wrote, “What's in a name? That which we call a rose by any other name would smell as sweet.” But many of us don’t think of the economy as something as pleasant a rose; we think of it as a bum-deal, or a system that’s stacked against us.
Our economy is our social environment, analogous in every way to our physical environment. It is a self-sustaining system that if left reasonably unfettered provides us with the signals and incentives that allow this planet to support its billions of inhabitants, each generation typically doing better than the last.
Just think of its perfection: You wake in the morning and desire a cup of coffee. Somehow that information was passed halfway around the world and among many thousands of individuals such that each person works in synchronicity to refine and transport the means with which you will brew that cup of coffee—heck, someone will even have it brewed and waiting for you if you want to take that route.
It is an amazing system, and thus undeserving of a name that has such a negative connotation among so many. We know our atmosphere provides us oxygen, we know that our biosphere more broadly provides us with the raw materials of life, and we should know that our Econosphere, or our economy, provides the essential signals that have allowed for the upward ascension of humanity.
I’m an economist, but I also consider myself an environmentalist—one who is deeply concerned with the health of our Econosphere, our social environment.
What do we need to know to at a very basic level to understand the Econosphere?
We have four basic laws of the Econosphere:
1. Law of Growth - Each new person brings additional new wealth to the world.
The essential raw material that creates value and wealth in our economy is the human potential. We have what we are born with, and what we make with that potential through education, training, collaboration and experience. The consumption of this potential, via trading precious leisure time for productive time is the fountain from which our economy spills forth. We’re born with what will sustain us, and that is why our Econosphere is a sustainable system.
2. Law of Information – No matter the problem, better information is always part of the solution.
The market is perfect; it is information that is imperfect. Recessions happen because we acted on poor information. For example, house prices will rise forever, Americans always pay their mortgages, etc… The problem in the housing bust was that our information was incorrect, not that our market economy mediates the distribution of capital.
Unfortunately, policy responses to recessions often hinge on “fixing the Econosphere,” as opposed to improving the information. You can’t improve the Econosphere any more than you can improve upon nature. We were one high school-level personal finance course away from avoiding this entire recession. We should be helping individuals acquire the information to make the best decisions possible; unfortunately, we are trying to warp incentives within the Econosphere and substitute the wisdom of billions of individuals with the judgment of a small group policymakers.
3. Law of Sustainability – Bounty comes from people and nothing else. The animating force of the Econosphere is humanity.
We worry a great deal about exhausting our physical raw materials, but the only raw material that really matters is us, humanity. For instance, oil is worthless in the ground; it is only valuable if we bring it to the surface, refine it, and use it for things like transportation or to heat our homes. All of the value in a gallon of oil comes from the human elements: demanding it as a component of our daily activities, and our refining it into products. It is only people that matter. As long as we have people, our Econosphere is sustainable. Of course you can argue that if we exhaust, say, clean water, we will exhaust our supply of people, as well. True. Fortunately, the Econosphere provides incentives such that we consume less of and produce more of those things that are scarce and of most value to us.
4. Law of Plenty – The Econosphere never takes from one to give to another.
Because all value spills forth from our trading our precious leisure time for time in the market producing goods and services valued by our fellow men and women, we will never have what is cynically referred to as a “zero sum game.” A zero sum game is system where there is a winner, and a loser. If one acquires, say, one dollar, that means that someone else has lost one dollar. Hogwash!
We do not have a fixed amount of wealth in our Econosphere. Rather, each of us creates wealth each day by using our abilities to produce goods and services to trade for the fruit of others’ abilities. Sure, some peoples’ abilities are more valuable than others, but that is not a zero sum game. Quite the contrary. The Econosphere if a benevolent system, where we can take our one raw material, our potential, and use that potential in the production of goods and services valued by others. Humanity is its own renewable resource, and the Econosphere guides us to get the maximum value from that key resource.
What are some false assumptions we make about the economy? How do we fail in our understanding?
The number one false assumption that is so often our undoing is the belief that our Econosphere is a fixed “pie” that we slice up. People assume that there is a certain amount of wealth in this world and that life is all about fighting for one’s own piece of the pie. Many do not realize that it is individuals producing and trading that create the economy each and every day. It is never about getting your slice of the pie; you bake your own slice! If we realized that, we would concentrate our efforts toward investing in the individual such that each person can get the most out of his or her productive life, as well as on protecting our natural Econosphere from harm.
Instead, because we think it is all about distribution of existing wealth, much of our activities, including the creation of needless mental anxiety and our often ill-advised public policy crusades, center on the distribution of wealth. The problem with that is that these efforts are not only soul-sapping in that they make us feel dependent on policymakers, but it also erodes our natural incentives to innovate and make more with our lives. We create our own wealth, and whether we are successful in that effort depends a great deal on having a healthy, unspoiled Econosphere in which to do it.
You talk about the surprising gift of inequality. What’s that mean?
The gift on inequality sounds kind of mean, doesn’t it? Well, I don’t mean it to be that way. What I mean is this: because there are varied outcomes to our activities, it makes us try harder. And the harder each of us tries, the better our collective outcome will be. If our outcomes were all the same no matter how hard we tried, we wouldn’t try hard. Think of it this way, if a race didn’t name a winner, would any of the participants run hard?
The possibility of improving the comfort and happiness of one’s self, one’s family, friends, one’s community is what creates innovation. Without innovation, we would still be cavemen. The existence of, and possibility of being like, say, Bill Gates, Warren Buffet or the guy down the street who was able to take his family on a nice vacation is the fuel in our economy’s tank. Without inequality, we would all be equally worse off.
How do governments influence economies?
Governments are a bit of an alien force within the Econosphere. They must be desirable, otherwise we would neither create nor support them, but they are not entirely governed by the same forces that govern individuals and firms. Moreover, they tend to outgrow their original mandate, which is to protect property rights.
The problem is that governments have a captive audience. If you do not like a certain product you will stop purchasing it, and the firm that produces it will suffer as a result. But, if you don’t like what policymakers are producing, you still have to pay your taxes. Absent a revolution, you are a permanent customer.
In a democracy, you can vote for one person or another, and thus exercise a right to choose, but the government will still remain. Moreover, because political lives tend to have phases, getting voted out of office is likely the beginning of a career as a lobbyist, board member or consultant acting as an intermediary between government bureaucracies and industry. The more wealth that government charges itself with distributing, the more valuable it is to employ such insiders in order to influence the distribution of those dollars.
All this means that the primary incentive of government is to get bigger, not necessarily better. The bigger it gets, the more it will distort the natural incentives provided by our Econosphere.
The real danger is that as government gets bigger, it will pollute the Econosphere such that it cannot support its inhabitants. Two vivid examples of this are China and India, both of which plunged their populations into extreme poverty by completely pushing out their market economies and substituting public policy, communism and socialism respectively, in their place. It was only after they re-cultivated natural market incentives that they were able to clean-up their Econosphere, and the result has been rapid increases in productivity and wealth. China and India are the story of this decade and decades to come, all because they became enlightened as to the degradation of their social environments. They saved and restored their Econosphere!
On a scale of 1-10 how healthy is our economy and what’s needed?
If ten is good and one is bad, let’s give it a six. We have seen some extraordinary adjustments made on the part of individuals and firms in what has been a very deep recession. We saw consumers pull back in their discretionary spending more sharply than we ever have in modern times. We saw them begin to quickly pay down their debt burdens and increase their savings to make up for wealth lost in their homes. We have seen many people transition away from ailing industries and make inroads into new vocations.
On the part of firms, we have also seen many difficult decision made in terms of headcounts and business configurations. We also saw the deepest inventory drawdown that we have ever seen since we began keeping track. All of these moves are not only incredibly smart and rational, but have set the stage for the recovery we are now starting to see.
Unfortunately, I also think that we have a bit of a self-inflicted information problem that will retard our growth in the quarters ahead. We have made uncertain so many policies, that we have made our information far less accurate than it otherwise would have been. What will healthcare cost? How will it work? What will taxes be? What will energy policy be? We have promised incentives to small businesses such as subsidized loans and hiring tax incentives. Until we know what those are, why would anyone hire anybody if they could possibly wait?
Where the Econosphere has been free to provide incentives and direct the activities of individuals and firms, we have seen great strides that will help us emerge as a strong economy. Where the Econosphere is not so healthy, the public sector, we have seen a great deal of unproductive activity that will keep us from recovering as quickly as we might have.
Will we experience significant inflation?
Yes, there is a 100% chance of inflation in the forecast. It’s inevitable; in fact it is already here. On a year-over-year basis, the consumer price index swung from -0.2% in October to 1.9% in November. It will accelerate further in December. As for the producer price index, over that same period it swung from -1.9% to 2.7%. That said, it will be at least a year before we see truly disruptive inflation. We have too much excess capacity and underutilized labor for businesses and workers to push for higher prices and compensation just yet. However, once we see higher capacity utilization and more people at work, the ramifications of our gluttonous fiscal policy will become evident in a quickly devaluing currency and higher consumer prices.
What’s the best way to profit in today’s economy?
There are only two things that people can do to create more value: work more and work more productively. There are only so many hours you can work in a week, so there are limits there. There are, however, no limits to productivity. First, know that your outcome depends on your productivity; seek out and apply yourself to where you can be most productive. If you need additional training, get it. This may mean writing-off losses on a home, picking up your family and moving to a new city. It may mean making dramatic changes. This is the tough love of the Econosphere. However, if you understand that the outcomes that you see are the result of individual decisions, and train yourself to appreciate the signals that the Econosphere is providing you—chiefly through market prices—you will achieve that epiphany that the world is not chaos. The Econosphere is predictable, as is your role within it. This understanding will help you make rational decisions for yourself and your loved ones.
That said, our purpose on this earth is not to make the most money, rather it is to maximize “utility.” Utility is an economist’s term that essentially means “happiness.” We work to maximize our happiness. That means a combination of life pursuing avocations as well as vocations—time at the beach, and time at work. We naturally find that balance as long as we are able to follow the Econosphere’s signals.
The reason I wrote the Econosphere is that as I have worked as an economist over the years, I have come to see the Econosphere as a system that allows each of us to get the most out of our chief raw material, our life. I want to help others to understand this so that they can achieve better outcomes and greater happiness; but there is a selfish reason I wrote the book, as well. I know that the more people there are who love and appreciate our Econosphere, the more people will want to protect it. I desperately want to protect our natural Econosphere, and we will need everyone’s help to do it. We have an Earth Day, but not an Economy Day. Maybe someday that will change. I surely hope that we can save our natural Econosphere so that it can provide for each of us and for future generations.
To learn more about Craig’s book visit www.theeconosphere.com
Jan 10, 2010
Wow, rose colored glasses never looked so rosy... And did anyone mention monopoly...or is that just a board game my kids play? Our wise forefathers came up with an attempt to protect "we the people" from how out of balance the Econosphere can get... with human nature and it's potential to enslave large portions of the population from corrupt and powerful forces. I agree that "humanity" is the greatest "renewing" entity...but it holds the greatest potential of being abused and exploited. In modern history, humanity, through experience and consensus, decided to have governments, through regulations, attempt to minimize the damage that can occur by the Econosphere, preventing it from injuring itself and others.... ..and it seems to me the times in history when there were no policy makers messing with the Econosphere, there was a bit more raping and pillaging going on throughout that renewing humanity, and the laws of abundance seemed to be a bit scarce... However, from a spiritual viewpoint, I do like the Oprah-esk concept of abundance that Vince mentions...and I truly do like his sentiment about happiness...it is quite a lovely ideal, except when Goldman-Sachs throws an entire society under the bus...and now we can all look forward to tough love healing the wounds brought on by the criminal elements of the Econosphere...I thought that's why we have a justice department...but there's that troubled public sector again...they just didn't seem to be around when we needed them...those free market folks made sure of that... So I think the point here is that the Econosphere does have it's own laws, proving that without sound and wise government policy, markets will fail...
What a sad and simplistic paean to the wonders of the free market. Markets are defined by governments - governments don't just protect property rights, they define what is property and who has a right to it. Do you have a right to breathe clean air - no. Do you have a right to own people - maybe. There is no such thing as a market not defined by the 'rules of the game' which are encoded into law and backed up by government. Tweak the rules and you get different outcomes. So as long as that is true - maybe government has a role in making rules that don't favor short sighted exploitation of resources while externalizing the social costs and exacerbating human's innate tendency to discount future costs and benefits relative to the now. Clearly this author flunked the section on market failures.
If economics were a science, then there would be a whole host of wealthy economists, but as it isn't - there ain't. I'll wager Craig Thomas' source of income is: Convincing others that he knows what he's talking about and collecting a tidy salary until it's discovered that he doesn't, and by hawking his book - preying upon the unfortunates who hope he's right instead of attempting to thrive by applying the principles therein.
The usual simplistic tripe from the right. See "Free Lunch" by Johnston for a well documented set of cases showing how the free market is being perverted. Yes, SOME motivation via scarcity is needed. But IT'S NOT AN ABSOLUTE VALUE. There are other values that enable the free market to function. The above mentioned book shows a great many things from Adam Smith that are frequently abused by the right. Smith would be horrified to see what is being done in his name. Even Reagan would not support what is being done using highly selected quotes from him. Why do they call it the right when it's not? What do conservatives CONSERVE?
Gee, I am an economist and I don't believe this tripe. The closest we have come to a truly capitalist economy was during the turn of the 19th century, a time of booms and busts. That is, a time of tremendous instability in the economy.....leading up to the Great Depression. If you think that was a great time to live, I welcome you to it. If we were paid the marginal product of our labor, wages would have been rising throughout the 90s instead of stagnating. Instead the owners captured that money in higher profits (read bonuses). Banks insisted they could regulate themselves and we got what we have now. All hail the great market which rests on a number of assumptions. The market you talk about is called perfect competition. For it to exists and operate properly we need a large number of sellers all selling identical products, perfect information on both the buyer's and seller's ends and easy entry and exit from the market, no externalities also....so tell me where that exists and then you might have a case for how wonderful the market is. This market does not exist, it is used as a benchmark only. When you rest your entire argument on this non existing market you have no argument....Really, what world do you live in? Bellecon
I humblly appologise to Mr. Thompson on my remark about MADMEN. I meant to address this comment to Mr. Thomas! Sorry MBow
Making laws out of unproven or even topics that have flaws? For example sustainability has limitations because of entropy. There are limited resources and carrying capacity will be reached. I'm very skeptical and may read the book but so far there are many flaws. Maybe the author is one physical science course away from seeing the adjustments he has to make such as making laws before testing a hypothesis?
Somehow we need to reclaim the free market system from government intervention and the large corporations and marketmakers. How hard did the Wall Street bankers work to earn their bonuses? Who was on the other side of the trade? What physical wealth was created? What jobs were created? We need limits on the size of banks, including Goldman Sachs. All that concentration of wealth creates an unlevel playing field, an opportunity to game the system.
This firmly blinkered vision, with it's emphasis on the good-old invisible hand, misses just about all of the mark. Just in case no one's noticed, that hand's been hiding a lot of the details that make a lie of the free market. The need for clear information about our economy was long-ago suppressed by the ability of those with the money to spend it on those bad-old government types, insuring that the group with a real need to know (the public) never finds out anything. What do I mean? Here's one concrete example, just one. There are many others. Witness the collapse of all those junk-stuffed "investments" otherwise known as collateralized debt obligations. All that was needed was to track what was actually going into them. We know how to do that and have since IBM invented the relational DB some 30 odd years ago. Track what's in them and make it public (which these days means on the Internet). That sort of transparency would have instantly surfaced any attempt to fill them with mortgage trash. That never happened, so there came to be a firestorm of demand for evermore of that trash. That meant the suits would make their commissions and bonuses. The regulators were, of course, not allowed to do any such thing since Congress had been carefully bribed. The railroad was running: more junk CDOs, which created more demand for debt-obligations (mortgages, credit cards, school loans,...) many of which never had a hope of being paid. In a consumer economy, blaming those who go on endless spending spree is like blaming a smack-freak when every street corner has someone giving away dime-bags of heroin and the cops have been paid to go drink coffee and eat doughnuts. The seemingly endless supply of blind faith on the part of people like Mr. Thomas, mark them as true believers, in the vein of Trotskyites and, of course, their intellectual decedents, the neo-cons. Heaven help us all.
I think Mr. Thompson should rate a lead role on "Mad Men". He certainly knows how to make Horse-Sxxx smell good.
Thanks for a well written treatise. One thing all those people who rant against the capitalist system never quite grasp is that it produced the wealthiest nation in history. Jack
Fantastic article. For those who are railing against the free market, just ask yourself this one question: "Would I want to function in an economy where I am proportionally rewarded for the efforts I put it, or would I want to function in an economy where no matter how hard I work, I get the same result." If you want the former, that's capitalism, equal opportunity NOT equal outcomes. If you want the latter, that's socialism/communism and we've seen how well that system holds up over time. Capitalism and the free market may have their flaws, but people want to be rewarded for their hard work, not have their wealth confiscated by a government and doled back out to them as the government sees fit.
Craig Thomas is supposedly talking about the way the economy really works, but instead talks about a free market economy that doesn't exist and never has.
After reading the comments, it is obvious that many simply did not read the article through, or realized Craig Thomas is talking about a concept (the free market economy) which you are opposed to. Probably due to the mistaken assumption that our current economic plight is the result of a free market economy (it isn't), or because you subscribe to a politically ideology that associates a free market economy with what the political opposition (Republicans/conservatives) espouses. Which is another mistake, as Republicans/conservatives are no more true free market advocates than their political opposition is. Both parties are not only gaming the system for the benefit of themselves, but for the respective special interest groups that support them... at the expense of all tax paying U.S. citizens
Mr. Thomas says "There are only two things that people can do to create more value: work more and work more productively." In a true "free market" economy, he'd be correct. However, since the government now represents nearly half of the economy, that's no longer totally the case. The best way for many now is to game the system, either through purchasing representation in government or exploiting the unintended consequences of government edicts. If current trends continue unabated, it will eventually be more profitable for me to not work contribute to economic output as I do now, and instead seek to maximize government benefits. This effectively negates his "law of growth" argument as more and more citizens are encouraged to siphon off the wealth of the truly productive until they too decide to quit.
Vince Thompson. The Econosphere: how the economy really works. We have failed economics. We have already the books on this. Read The death of Economics by Paul Omeroid and many. However I save your time. Come the next election Obama says, ?Here I am giving my Noble Peace Price, I was surprised and do not deserve but thank you? A similar story in UK. Ireland Peter Robinson stays as is. Putting him under the sedation or stimulant will not help and painting the wall of the prison is no good at this level. I have just seen the Video of Italian's Prim minister and Alistair Campbell in the same position. ?I am in charge" while the Iraq inquiry continues. Italy has the worst hospital reputation now so I guess we have problems in medical field but the prisons are full also and the snow helps little. Honest. All are right now including BBC and Northern Rock, the CEO asking for more bonuses. We are the only ones with little head and too many worries. Shall I send you some Diazepam? Precatory MEANING: adjective: 1. Expressing a request. 2. Nonbinding: only expressing a wish or giving a suggestion. From Latin precari (to pray). Ultimately, from the Indo-European root prek- (to ask) that is also the source of words such as pray, precarious, deprecate, and postulate. "Even worse, [the proposed amendment] is a deception because it amounts to nothing more than a precatory expression of pious hope." Robert C. Byrd; A Hollow and Dangerous Promise; The Washington Post; Oct 31, 1993. "'The laws are precatory as opposed to mandatory,' said Scott Sommer, 'They say the city "may", rather than "shall", enforce the housing code.'" Deborah Sontag; A Weak Housing Agency Seems to Be a Step Behind; The New York Times; Oct 7, 1996. Thoughts are the shadows of our feelings -- always darker, emptier, and simpler. -Friedrich Nietzsche, philosopher (1844-1900) I thank you Firozali A Mulla
Mr. Thompson I understand why Economist are in the top five BS artists list after reading your article. The Monetary system is a Pyramid scheme. Free Market doesn't exist. It is all one big corporation. It is a rigged game. Here is an indisputable fact for you. There are thousands of people starving to death everyday because they have no money to buy food or the materials to create regional sustainability. There is plenty to go around but scarcity=profits. I could list so many negative attributes of the monetary structure that far exceed the positive. The Venus Project offers an up to date alternative to the obsolescence of the monetary system.
...but the big players at the top rig the game so they get to take most of it. The economy isn't perfect; it tends toward the development of monopolies which distort the market forces that should keep things in balance. Only government can curtail this tendency, so, far from only polluting the economy as Thomas implies, government has a vital role in maintaining the health of the economy. This is a role our government has shirked in recent decades.
Like too many economic theories it gets a bit distracted by the beautiful assumption that people tend to make economic decisions based on rational consideration of facts, and that indivual self interest will naturally aggrigate. The problem of course is that to some degree all decisions are clouded by some level of irrationality, and whole systems can't be understood just by looking at indivual parts.
When someone talks to us as though reading from the big book of fables, I'm always reminded of that great modern fable "Animal Farm," where "all pigs is equal 'cept some pigs is more equal." For instance, "Where the Econosphere has been free to provide incentives and direct the activities of individuals and firms, we have seen great strides that will help us emerge as a strong economy. Where the Econosphere is not so healthy, the public sector...." Just exactly where are these great gains in the private sector? The way I hear it is, since they've been saved the bankers don't want to listen anymore to the need for them to lend money. Instead of investing it with people who want to buy houses, let's heat up the stock market again, then when that's bubbling nicely, we'll put it into real estate, which should be desperate for cash by then. Sound familiar? Well, at least there's no double-speak when he talks about the gift of inequality. His conclusion is absolutely true: "Without inequality, we would all be equally worse off." Truly, those who are made filthy rich by tax favors and special deals will suffer much less than the rest of us. For one thing, they'll have the bribes to corner the market on apples when they go to make their daily slice of the pie. "We create our own wealth, and whether we are successful in that effort depends a great deal on having a healthy, unspoiled Econosphere in which to do it." I'd call the business/government collusion that encircles our necks a filthy cancer on our Econosphere.Of course then again, I'd never buff up Bill Gates by association with Mr. Buffet, at the latter's expense. Please, try this game: go back through this pernicious tripe and ask yourself why you feel slightly dirty whenever he's talking about you and wide-eyed admiring whenever he's talking about the brigands buggering us all.
May be we need to get our current government officials to read this book they might wake up....wishful thinking ! I worry about inflation. Better buy what you need now !