Initial Thoughts on Econ 101

One of the things that my professor said yesterday stuck with me. “If an economy does not produce enough capital goods, it will not be able to grow.”  So, he said, you always want your economy to be producing as much as you possibly can, aka you want it to be ‘on the Production Possibility Curve’, but you don’t want the balance of what you produce to be weighted too much towards consumer goods, and not enough towards capital goods (and training and whatever). And you also want to be producing those things with as few resources as you can. (It’s murky whether ‘money’ counts as a resource here. Economists seem to randomly flip-flop between counting it as one and not counting it as one, and they never ever tell you until you’ve already misunderstood them, when it’s too late. I think many of them get a kick out of this.)

So. Sure, some of this is obviously true. If you don’t have the equipment you need to do your job (we’re assuming a closed economy here) and your equipment is slowly breaking down, all other things being equal, your economy is shrinking, not growing. And what’s the point of not producing everything you can? Sure, you don’t want to be polluting too much, but if we want to pollute less, we can produce more jazz dance classes and solar panel research facilities instead of more cars. However, entirely absent from the conversation so far, and from my textbook so far, is another concept which seems to fit right here, and which seems every bit as important as the capital goods/consumer goods balance. And that is that if you want your economy to grow in the future, in addition to that balance, you can’t be producing things with the fewest possible resources, at least if you count money as one of those resources. Because if you pay your workers starvation wages, then they won’t be able to buy anything tomorrow. (And won’t be willing to work anyway. I would make some kind of snide remark about the American South having solved that one, but… oops, I just did.)

Now, I’m not saying anything new here. Practically everybody knows the quote from Ford about paying his workers enough to buy his cars, and too many of them trot it out proudly when given the least opportunity. But I find it quite telling that it is simply not part of the Econ 101 conversation at this stage, where you’re talking about how you grow the economy in the future, and where it would fit perfectly into the discussion. Why isn’t it here?

Also missing is the subtler point that the relationship between producing capital goods and consumer goods has to be a curve, with an optimum point. Why? Well, assuming a closed economy, if you produce zero capital goods your machines all fall apart and you can produce much fewer goods next year. If you produce zero consumer goods, though, your workers all die and you can produce zero goods next year. If you produce few capital goods, your equipment is crappy and/or badly maintained and you produce fewer goods than you might. If you produce few consumer goods, then your workers may well all be fed but their morale will be crappy, and as little as Americans (workers or employers) like to admit it, morale has a huge impact on the productivity of a worker.

Instead, the textbook, and the teacher, painted this as competing interests: more production next year if you make more capital goods, a higher standard of living this year if you make more consumer goods. That’s true at some places on the curve, and just completely false on others. The Soviet Union, an example he trotted out of a place sacrificing consumer goods to make capital goods, is a beautiful example of what I’m saying too: their productivity was horrible. Some employees were literally negative inputs, sabotaging the things they were working on as they were making them, destroying the value that other people had already added. A major reason that the Soviets were so unhappy was because they were so poor. (The brutal repression may have been another reason, or it may well have simply been the reaction to the unrest caused by that extreme poverty.)

You don’t have to go into this now, I guess. But if you don’t, then why go into the ‘an economy can’t just make consumer goods’ argument? It seems like you should be making both or neither.

I don’t know. What I’m learning so far seems woefully incomplete… not just in the ‘this is only a 101-level course’ way, but in the ‘welcome to class, here are your blinders, they are required wearing anytime you are thinking about economics for the rest of your life’ sort of way. And isn’t it funny exactly who those particular blinders just happen to benefit?