The Importance of Producing Stuff

To my mind, the ability to make distinctions is one of the more important characteristics of a fully civilized human being. Savages, very small children and animals do not share that characteristic. An untutored person will not be able to distinguish between two related but separate concepts. Indeed, the ability to do arithmetic depends on the ability to distinguish numerical information. I cannot stress enough the importance of being able to do arithmetic because those who refuse to do (or cannot do) arithmetic are doomed to speak nonsense. A bit of arithmetic is often all that is required to demonstrate the idiocy that pervades public discourse around the world.

Take the matter of poverty, for instance. If one were to think about it for a moment, one immediately realizes that the simple division operation throws much light upon the issue. Here is what I mean. You aggregate the stuff available in a specific period and divide by the number of people. If the result is a small number as opposed to a large number, you have poor people as opposed to rich people. Stuff matters. What is stuff? Things that you find, things that grow, things that you produce, and so on. At the very bottom of the structure of any economic system is stuff. Economists call it “goods”.

This does not appear to be quantum mechanics. But it might as well have been quantum mechanics given the widespread ignorance of that fact that goods – or stuff, as I like to call it – lie at the foundation of the economy. Sure there is “services”. Haircuts, dentistry, advertising, computer programming, and so on are services. But underlying any service you can imagine, there is stuff. If there wasn’t stuff, there would be no services. For instance, I sing you a song (hypothetically that is, because my singing is nothing to write home about) and you pay me for it. That payment is just a simple transfer of claim to resources that finally end up in stuff. I take the money and buy stuff to eat or to wear or some such. That transaction we can call ”transfer”, since we have not produced any more stuff, only you have transferred your claim to stuff to me.

Stuff matters. The aggregate amount of stuff available to a population matters. Like I said, you could just find it (oil in the ground, fish in the oceans), or you could grow it (in farms and orchards), or produce it (factories). Only when you have stuff can you indulge in transfer (via services rendered) or exchange (trade). Pure exchange does not increase the aggregate amount of stuff available. Taking from Peter to pay Paul does not make more stuff available.

Stuff is produced using land, labor, and capital – the factors of production. Advanced industrialized economies use relatively more land and capital (and use them more efficiently given that they have advanced technologies) and relatively less labor and produce a lot of stuff. The average amount of stuff available is therefore high because they have fewer people to divide the stuff among. So they are rich. They are rich not because they have more money, but because they have more stuff per capita. Since they can produce a lot of stuff using less labor, all of the labor is not employed in producing stuff and so the surplus labor can produce services. and the labor involved in services can be given a share of the aggregate production of goods. That share is called “income”. And this income is denominated in monetary terms. Money, in this case, is for facilitating accounting of the stuff produced and who gets how much. If you don’t have stuff backing the money, it is useless. That is, handing out money to people does no good unless there is some stuff behind it all.

Production of stuff matters. That labor is required to produce the stuff is an unfortunate fact of life – so far at least. In a perfect world, robots would produce stuff and people would be unemployed, free to compose music or watch the grass grow or whatever. In the imperfect world we live in, we have to use labor to produce stuff. But the less labor we use to produce stuff, the better off we all are – with the obvious caution that we have to distribute the stuff equitably, of course. But the problem of distribution only arises after we have produced stuff. If little is produced, little can be distributed on average and therefore on average we will be poor. Distribution is a less taxing problem than production.

Now here is the point that I am building up to. If an economy produces a heck of a lot, and yet a significant percentage of the population is poor, then we know that there is a problem of distribution. In that case, we can improve the situation by a better distribution through transfer of stuff to those who are poor. But if the aggregate production of stuff divided by the total population is a small number, the economy will be a poor one irrespective of the distribution. Merely taking from Peter to give to Paul makes no difference to the aggregate amount of stuff available.

So here is the basic question we need to ask: Will a proposed scheme or policy produce more stuff or not? If the answer is no, then we have not solved any problem. Take internet kiosks in rural areas. From what I gather, they are being mainly used for astrological charts, internet chat, e-governance services such as the printing of caste certificates (whatever that is supposed to be good for), “learning computers” and other such services. If internet kiosks in rural areas does not directly, or indirectly, lead to the production of more stuff, it is pointless. Or take the “Employment Guarantee Scheme.” Merely giving people employment does no good if in the end more stuff is not produced. Might as well get people to dig holes in the ground and then fill them up again for all the good it does to the overall economy.

We need to distinguish between employment and production, between money and income, between aggregate production and distribution. India’s economic policies have stressed employment and not production. That, in no small measure, is why India is poor. Until India’s economic policies shift away from employment and towards production, India’s fortunes are unlikely to change.

Adopting Innovation (from the archives)

Yesterday I wrote about the small stuff. That brought to mind some related stuff that I had written earlier and I thought I would refer to them here, for the record. Adopting Innovations:

People, societies, economies which can successfully adopt innovations tend to do better than those that don’t adopt innovations. The operational word is adopt. Innovations happen all over the place and all the time. Who innovates and how is not what I am concerned about although it is a fascinating subject in itself. What I am concerned about is the adoption of innovation rather than the causes innovations.

This is from one of the earlier It’s the small stuff, stupid posts:

I could go on and on ad nauseum about little innovations that have been around for ages and which we can adopt costlessly. I could fill volumes, honestly. There is a more important point all this is leading up to. That is, we need better technology, not necessarily ICT with its computers and cell phones and internet and world wide web. By technology I mean know-how — how to do stuff. The know-how exists. One just has to observe and learn and adopt. But observing, learning, and adopting takes thinking and effort; it is not as easy as simply buying a bunch of computers and firing off Microsoft Windows.

I am not a Luddite and I am not against hi-tech. Some of my best friends are techies and my education is in computer sciences and engineering and my salary is paid by a technology company. I just happen to believe that hi-tech needs a foundation and that foundation is made of lo-tech. Hi-tech without the lo-tech is about as useful as a car with a fancy engine but no wheels. Hey, that is a good analogy. A car with a fancy engine ain’t going anywhere in a hurry without wheels. And even if you do figure out that wheels are needed, you can’t go far if you don’t get round wheels. Square wheels just won’t do. Then even if you get round wheels, if the tires are not inflated, you get around with a lot of loss of fuel and in discomfort. That is, without air in the tires, your transaction costs are higher.