Ideas dictate the destiny of economies

What is poverty? Who’s a poor person? What’s a rich economy? These questions have engaged some of the brightest people for centuries — and no doubt it will continue to fascinate some for centuries. My answer to what is poverty is simple: poverty is a lack of stuff. A poor person is one who does not have enough stuff. It is a technical word. You may not see it used very extensively elsewhere but stuff is a very important word.

1. Stuff Fundamentalist

Fundamentally, it is all about stuff. The universe is stuff, of course. The economy is also about stuff. Stuff and one more thing we will get to in a bit. The necessary ingredient for making an economy, as I have argued before, is people. Without people, you don’t have an economy. You can have the whole planet with trees and animals and fish and rivers and mountains and oil and land and rain and volcanoes and storms and . . . But until you have people, you don’t have an economy.

The thing is that people are made of stuff. They are “stuff input-output” mechanisms, interacting with the environment which is made of stuff. Their bodies are made of stuff and they manipulate other stuff with brains that are made of—you guessed it—stuff. It is all about stuff and one other thing. That other thing has something to do with brains. More specifically it has to do with human brains: Ideas.

Stuff and ideas: that sums up the entire list of ingredients that you need to cook up an economy.

To a first approximation[1], the amount of stuff in the planet today is no different than was available say one hundred years ago, or even a billion years ago. There is some interchange of energy between the earth and the rest of the universe, naturally. There has to be a source of low entropy energy and a sink for the high entropy energy. For our purposes, we will just consider energy as just another form of stuff (as Einstein demonstrated a century ago), although in a bit we will see that the special form of stuff we call energy has a special place in the overall scheme of things.

The total amount of stuff on earth is constant. What changes over time is the arrangement of the stuff. Much of that stuff gets rearranged through non-human agency over time, and that has been going on for billions of years. The earth cools, continents drift, animal and plant life evolve (speciate, and go extinct), and so on. Only relatively recently, human agency has been mucking around with the stuff and rearranging it. Of course, non-human living things also rearrange stuff but they do it instinctively. Humans do it intentionally, and with some degree of foresight and conscious design. Reorganizing stuff takes energy and ideas.

For most of human history, the primary source of energy was muscle power. At some stage, captive muscle power came to be added with the domestication of animals and the enslavement of people. Fire as a source of energy was also present but the ideas on how to use it effectively arose gradually. Animals and slaves (a distinction that slave owners probably did not care to make) had to do for a while.

Slavery as a source of muscle power largely disappeared when ideas appeared on how to efficiently use non-human energy sources. Fossil fuels did more for the eradication of slavery than is commonly appreciated. Where slavery still persists, it is largely because they have not figured out how to substitute muscle power with more efficient ways of using energy.

The story so far is that you have to transform the stuff that you find lying around. You can neither create new stuff or utterly annihilate stuff; you can only re-arrange or recombine them into new stuff. You need some source of energy to make the transformation. And you need ideas because they allow you to use the energy effectively on the stuff around. A good economy is one where people are most successful in transforming stuff into useful stuff with the least negative effects on their own well-being.[2]

To sum up this bit, stuff matters because we are made of stuff and need stuff. Ideas are important because otherwise we would not know how to do the transformation of stuff. Besides, ideas help us harness the needed energy.

I am a stuff fundamentalist. I believe in stuff. First of all, I am made of stuff. Second of all, I use stuff. I eat stuff, wear stuff, use stuff to get around, need stuff to shield me from the natural elements, etc. We all do. Those who don’t have stuff that they need to use, are poor. Poverty is the lack of stuff. Everything that we do, ultimately involves stuff.

From the composition of sublime music to mind-blowing accomplishments of theoretical physics—they all involves stuff because they are all produced by people who, as we can easily appreciate, need stuff. Any system that produces lots of useful stuff has the necessary (though not the sufficient) condition for producing all sorts of things. Conversely any system that is unable to produce stuff in sufficient quantities is one that is characterized by poverty.

Take any subsystem of our world. If you look under the hood, the engine you will find is basically stuff. Let’s take the University of California. It has buildings built by people who needed food, clothing, and all the rest of it—all of it stuff–to survive. The researchers and teachers? Same story—at the bottom of it all lies stuff. Machines? Made by people . . . It’s all stuff.

2. Idea Fundamentalist

Stuff is not just stuff. It is not any old stuff lying around. As mentioned before, it is stuff transformed through ideas. Forget that bit about my being a stuff fundamentalist. Actually, I am an ideas fundamentalist. Ideas transform any old stuff into useful stuff.

I can lead you to a huge mountain of iron ore. But if you don’t have the coal and other things needed to extract the iron from the ore, you are SooL. Even if you have the coal, if you don’t know what needs to be done — that is you don’t have the ideas — you are also SooL. Getting iron from ore required both energy and ideas (another word for which is technology.)

There are very few things we use that are the raw stuff of the universe untouched by human hands. Most the stuff that we use are things that have been transformed by human hands, and more importantly by human minds. In a strict sense, useful human artifacts are embodied human ideas. As humanity advances, more and more things get to be that way. A machine is an embodiment of human knowledge or human know-how.

Compare a horse-drawn cart to an Airbus A380 jetliner. The cart has a few ideas embodied in it: the wheel, the fixed axel, the harness, the blinkers. But the super jumbo-jet? The list is endless—principles of aviation, the technology of jet propulsion, high strength materials and high temperature metallurgy, electronics, avionics, organizational theory, complex contractual negotiations, legal systems, and the rest of it. I don’t think there is a single area of human knowledge that is not in some way intimately and ultimately tied to the production of that marvel of human ingenuity.

If you were to follow all the links in the web of ideas that went into the production of an A380, you would traverse the entire set of technical ideas ever to cross the human mind. An Airbus A380 is just one example out of millions of artifacts, all products of human technology. Technology is essentially ideas. It is knowledge of how to do things.

Natural resources — land, minerals, water — no doubt is necessary. But without ideas, they are of not much value. You may have an oil well underneath your land. Until the technology came into being for extracting and using that oil to some end, you were out of luck. All the raw ingredients in the world will be of little value until you have the recipe. Ideas are the recipe that make something out of the stuff that nature provides.

Ideas have two important characteristics that differentiate it from stuff. First, ideas are non-rival in use, whereas stuff is rival in use. When I consume some amount of stuff, the total amount of stuff available for others to consume grows down. My gain is your loss, given a fixed amount of stuff. But if I use an idea, it does not reduce the total stock of ideas available for others to use.

The other thing about ideas is that they are built upon simpler ideas. All ideas, except for the most basic (the primitives) are combinations of other, simpler ideas. There is a hierarchy of ideas. And as the stock of ideas grows, the set of potential ideas that are combinations of the elements of the current stock increases exponentially. Of this set of potential ideas, only some will be brought into existence by minds that are sufficiently prepared. That “sufficiently prepared” implies that minds have to understand, or internalize, at least a subset of the existing stock of ideas. In other words, you don’t have to re-invent the idea of a wheel. But you have to know that there is a such a thing—an idea—as a wheel and then you can go on to combine it with the idea of a lever to come up with a complex idea, the wheelbarrow.

No one of us is sufficiently smart to come up with all the ideas all on our own. Even if we were that smart, we are given only a finite amount of time on this mortal plane. Fortunately, ideas are non-rival and therefore ideas invented elsewhere and whenever are available for us to use, provided we are sufficiently smart to adopt them. Anyone anywhere can use the decimal system of arithmetic invented centuries ago by Indian mathematicians. Anyone anywhere can use Einstein’s relativity theory, or Darwin’s theory of evolution through natural selection. Once discovered, an idea is forever.

To recap the story so far. We need stuff that is transformed by ideas into more useful stuff. The stock of ideas is large and growing. To create more useful stuff, we need to use the existing stock of ideas and using our ingenuity, create even more ideas. Those who are the cleverest, use ideas most effectively to have the most goodies.

A slight digression is in order here. You can have stuff that you didn’t produce but merely snatched it from the other guy who produced it. As a strategy, it may work in the short run, but in the long run you cannot make a career out of theft. For sustainable development, using the best ideas to produce stuff yourself is better than begging, borrowing or stealing stuff.

3. Energy Fundamentalist

Transforming stuff requires not just ideas, as has been previously noted, but also energy. Every process in the universe requires energy. Forget about what I had said about being a stuff fundamentalist or an ideas fundamentalist. I am really an energy fundamentalist. Without energy, ideas and stuff don’t amount to a hill of beans.

The material progress of human civilization is basically due to its increasing ability to use energy. The range of sources is impressive: wind, water, biomass, coal, oil, geothermal, nuclear fission, solar. Mass manufacture produces useful stuff and requires huge factories which have machines. These machines require energy. The cost of producing stuff depends on the cost of the energy that goes into producing it. The price of the stuff depends on the cost.[3]

Once we start thinking about energy, once again we find that we cannot get away from the realm of ideas. It’s technology that allows the discovery and efficient use of energy. That’s another way of saying “Ideas allow the discovery and use of energy.” If you had the technology, you could use oil from below the ground; and if you had better technology, you could use the incident solar radiation. Fossil fuels are limited and costly; solar energy is super-abundant, virtually limitless, but we don’t have the technology to use it efficiently. That is the bad news. The good news is that we can develop the technology. It is a matter of getting new ideas. There is a meta-idea there: the idea that we can figure out the set of ideas that will go into the technology to harness solar energy. The systematic search for new ideas is called research and development, R&D.

Production of stuff matters in the sense that the wealth or poverty of a population is determined by the ratio of stuff to people: if the ratio is sufficiently small, you have poverty. Energy is a very critical element in the production function. Efficient production requires the use of technology and energy. Technology is embodied ideas. The production of ideas itself requires the use of existing stock of ideas. Knowledge of the existing stock of ideas requires education. Good education allows one to build upon the existing stock of ideas and create new ideas. I suppose I should now admit that I am really an education fundamentalist.

4. Education Fundamentalist

Never mind what I said previously about being a stuff fundamentalist. Yes, stuff matters but not as much as ideas. But ideas without energy to use is impotent. So ideas matter both for producing stuff and for producing the technology to harness energy. Yet, if you are not educated, all the ideas in the entire universe will pass you by like so many neutrinos.

Honestly, here’s the bottom line. To escape poverty, an economy needs an educated population. This is so because an educated population will not only be able to use the stock of ideas but will create more ideas. That is, they will have access to technologies—which in turn will help them harness energy and transform stuff. The more stuff the economy produces efficiently, the more wealth the economy has.

An operational definition of education will have to do for now. There are broad similarities between what is an educated person and what one would call an educated economy; after all, an economy is a collection of individuals. The quality and level of education of an economy flows from aggregation of the educational qualities of the population. An educated person is one who is able to make the right choices and allocate his or her limited resources to fulfilling a wide range of needs efficiently and effectively. It is a matter of resource allocation. What to produce, how much to produce, what factors to use in the production process, how much to consume and how much to save (that is, invest for the future), how to organize time and prioritize tasks, what to borrow and from whom, and so on—all these are choices that an individual is forced to make.

How efficiently an individual solves that resource allocation problem is a measure of how educated the individual is. It is an operational definition of education and does not make references to how many of what formal degrees the person has.

In a similar sense, an economy which is able to efficiently solve the resource allocation problem is educated. It produces goods and services using methods that are efficient, it allocates its productive assets in the most important ends, it has institutions that help in the production and distribution of goods and services, it is just and fair towards all its constituents, it ensures intergenerational equity, grants freedom of various kinds to its citizens, etc.

There is one important distinction between an individual and an economy. The individual has to operate within the society that it finds herself in. She takes a lot of the constraints as given, as exogenous to her. She cannot change the rules of the game, or the level of prosperity of the economy, or the set of institutions that exist. The economy, which is a collection of individuals, does not have that same set of constraints. For the economy, nothing is a given; it can choose which set of rules it wants to play the game with. The constraints for an economy are endogenous; they arise from within the system.

For instance, the economy chooses the planning horizon, which can be either long term or short term. The individual is mainly concerned with her life-time, or at most her children’s. For example, the individual is restricted to this or that educational institution from among the existing one and she takes it as a given. The economy, in contrast, has the freedom to choose which set of educational institutions will be allowed to function and for whom.

The individual follows rules which he cannot alter. The society chooses the set of rules. Of course, the set of rules the society creates emerges out of the collective choice of its constituents. Therefore a definite degree of circularity is involved: the people as a collective choose the set of rules, and the rules themselves dictate what choices are available to the people as individuals. The choice that people collectively make  depends on the level of education of the people, which in turn depends on what the previous choices were. In other words, there is a dependency on the initial set of rules. If the rules were by some chance chosen such as to induce intelligent subsequent choices, it is a virtuous cycle. It all comes down to a random draw: the initial set of rules are as if from a randomly draw and then the rest of the game is fairly constrained by that initial positioning of the pieces.

5. Rules Fundamentalist

Enlightened leadership emerges out of an enlightened population. And an enlightened population is the result of enlightened leadership. It is a recursive process with one boundary condition which is the initial choice, which in most cases is a random draw.

To move from generalities to specifics, let’s take one specific economy and one rule that it set for itself: the United States of America and its rule about the freedom of expression. By a random draw, those who wrote the constitution – the book of rules that will govern the new republic – were in favor of free expression. That rule-set granted all citizens to speak and write whatever they chose. Under the American constitution, you were free to speak your mind. In other words, your ideas were available in a marketplace of ideas and may the best idea win. And when you allow a population—or more accurately, when a population allows itself the freedom to express itself without restraint—to throw ideas into the ring, the best ideas emerge victorious. And that leads to prosperity through the process of technology.

The greatest strength of the American Revolution is that it allowed the expression of ideas. The constitution of the United States and the Bill of Rights is a phenomenally unique institution that to no small degree makes the US the pre-eminent power of the world. Repressive states don’t allow free expression around the world and the results are clear to see. We once again come back to the primacy of ideas. Ideas dictate the destiny of economies.

{This is a revised draft of the post “Stuff and Ideas — Part 1” (Dec 2007).}

NOTES:

[1] The phrase “to a first approximation” is a very useful one. It signals that what follows is a statement about the broad outline of the beast and not all the minor details that are not relevant to the task at hand. To a first approximation, people don’t own private jets. That is to say that the number of people who own private jets is less than even the rounding error in the estimate of the number of people in even a rich country.

[2] For the moment we will only use a very broad definition of “well-being.” Suffice it to say that our well-being is intimately tied to the well-being of others, both of the current and future generations of living beings. It is shortsighted to trash the environment or to provoke a massive die-off of existing species to just get more stuff.

[3] The distinction between cost and price is very very very important. Too many people use those words interchangeably but they are not synonymous — not when we are talking about economics. The examples of sloppy thinking arising out of mixing these two words are distressingly common.

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