"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Wednesday, June 13, 2012

Is the Economy an Ecosystem?

Or maybe it's a feedback loop. Or a circle of life.

Nick Hanauer thinks it's all of the above in his TED rejected lecture, with the driving force behind the whole ecosystem [that's what he called it on the June 13, 2012 edition of schiffradio.com, tossing in lions and zebras] being the consumer.

Same thing if it's a feedback loop, or a "circle of life" [his words]. What sets the loop going is the consumer. The producer is just a little squirrel.

Here's the squirrel quote:
So when businesspeople take credit for creating jobs, it's a little like squirrels taking credit for creating evolution. In fact, it's the other way around.

And here's where he gives the consumer all the credit:
I have started or helped start, dozens of businesses and initially hired lots of people. But if no one could have afforded to buy what we had to sell, my businesses would all have failed and all those jobs would have evaporated.

That's why I can say with confidence that rich people don't create jobs, nor do businesses, large or small. What does lead to more employment is a "circle of life" like feedback loop between customers and businesses. And only consumers can set in motion this virtuous cycle of increasing demand and hiring. In this sense, an ordinary middle-class consumer is far more of a job creator than a capitalist like me.

Peter Schiff asked him if any ole consumer creates these virtuous circles of life, even one with no job whose sole income is a welfare check. Absolutely, replied Nick.

Let's give IR [=Interested Reader] the floor, and SD [=Smiling Dave] will help him out.

IR: Sounds pretty convincing, no?

SD: It is indeed true that if nobody is buying there will be no companies. It is also true that we have a symbiotic relationship between the producer and the consumer, each one benefiting the other.

IR: Everything he says seems right. So does his conclusion follow, that the businessman is just a squirrel, and the welfare couch potato is the creator of jobs? It sounds very fishy to me. I mean, my hero is supposed to be the fat slob who does nothing? But I'm a beginner in clear thinking, Dave. Help me out. What's his mistake?

SD: He's got two huge mistakes. Let's start with the one that is more obvious, then we'll dig deeper for the more basic one that will blow him out of the water.

IR cocks his ear at this point.

SD: Here's the obvious one. Let's look at a "circle of life" we see every day, an automobile tire. Is one part of the tire more important than the other? Can we say only the left side of the tire sets everything in motion, and the right side is just a squirrel?

IR: But without the consumer there is no business.

SD: True, that's the left side of the tire. And without the businessman making things there is nothing to consume. No house, no furniture, nothing. In fact--

IR: OK, Dave, I get it. No need to go on. But what about the ecosystem analogy? There are lions and there are zebras. The zebras eat the grass, the lions eat the zebras.

SD: Well, I do have a question. Where do new zebras come from after the original ones are eaten? Where does new grass come from after the zebras eat some?

IR: I never thought about that, but I see two possibilities. The first is that the jungle is so huge that there is an endless supply of grass and zebras, so there is never any shortage.

SD: True, but that certainly does not describe any economy in the human world. We have only a finite amount of stuff. If all the cellphone factories close down, there will be a shortage of cellphones. If all the clothing factories close, there will not be any new clothes. The things we have wear out, and new people are born who need things, and we have to constantly replenish our stock of everything. We do not have an endless supply of consumer goods.

IR: OK, so we live in a jungle that is not infinite. I give you that. But I have another answer for where the grass and zebras come from. Mother Nature is doing Her thing. It happens by itself. The grass grows from the sunlight, the zebras grow from reproduction. Ah, Nature, how generous you are!

SD: Look around in your house. Do any of the things there come spontaneously from the bounty of nature? Does you air conditioning, your washing machine, your car, anything really, just grow by itself?

IR: Well, my food, maybe.

SD: Unattended, there would not be enough food to support all the billions of living people. Most of them would starve, and we would be left with the small amount of people that existed in cavemen times. There just wouldn't be enough food any more.

IR: I'm not sure where you are going with this. OK, so an economy is not exactly like a lion-zebra-grass circle of life. They get free grass and free zebras that grow spontaneously; we have to actually make our things. But so what? 

SD: So everything. That is the deeper, more basic flaw in his whole theory. The fat slob who does nothing is consuming [=burning up, destroying, making more scarce] our supply of stuff, and doing nothing to replenish it. If Hanauer has his way, the great store of wealth we have built up over centuries will just be dissipated. Giving people free money to take what they want and give nothing in return is not a Circle of Life, it is a Noose of Death, that will slowly get tighter and tighter around our necks.

IR: I don't get it. Are you saying nobody should consume anything? Should we just make stuff and never use it?

SD: Of course not. What I am saying is that the fellow who sets in motion the virtuous circle of a thriving economy is the one who makes sure we don't run out of things, the producer, the businessman, the entrepreneur. And yes, of course it is a symbiotic relationship. We reward him and encourage him for giving us what we need by paying for what we take from him. But let us remember that the producer is the engine, and the consumer the caboose.

IR: What about the other stuff Hanauer says in that speech? The stuff about the rich having so much money they could never spend it all on t-shirts?

SD: C'mon IR, we have discussed that many times. He is repeating Keynes' argument about hoarding. Do a search on this site for "hoarding".


Monday, June 4, 2012

About Comments

I love getting comments about how great my stuff is, of course.
But sadly, I usually am unable to reply, for technical reasons.

Bottom line: Keep 'em coming, but don't expect a reply. My apologies.

Also, If I don't answer a rebuttal to an article, doesn't mean I don't have one.
Smiling Dave prides himself on the quality of his readership. You must have some brains if you got here in the first place. So I leave it to the reader to sort out who is right.

Thanks to all 5,000 of you for dropping by.