This thing we call "The Economy"

The Economy is this weird word that seems to be about as versatile as the word “fuck”: “The Economy is shit lately" “We need to stimulate The Economy” or the classic “Buying an [car, house, vacation]? In this Economy?!” Almost sounds like it's both some powerful sentient being, and a natural malevolent force that cannot be influenced.
The Economy is how we provide for each other
Doesn’t matter how you organize labor and property (anarchy, communism, capitalism, socialism, hybrids, etc), people need food, water, shelter, community, etc.
The Economy is whatever system we use to coordinate our efforts to acquire and provide these things to each other. It's the complex web of productive capabilities and ways of transferring the fruits of these capabilities to people who need or want them.
We all participate in The Economy in some way as consumers and/or producers. Unless you're completely off-grid with all the tools you use made from what you can get on your own property, you're dependent on other people to survive.
That dependence creates the need for some system of governance that best rewards people for being productive and give people the ability to buy what they need and want using those rewards.
The Economy is the engine, The Government is the mechanic
The Economy is the productive capacity of the people. It's the mines, the factories, the farms, the transportation networks, the stores, the customer service call centers, the advertisers, the capital markets, the skills people have, the designs they've created; everything that works together to accomplish something as simple as making a pencil.
If an Economy is robust then much can get done. If an Economy is fragile then it’ll be very difficult to get things done. The robustness of the The Economy is determined by its ability to produce goods and services AND the ability to retool towards new more valuable goals.
In that way a bigger economy that actually makes stuff is usually more prosperous than one that produces little (China vs the UK). Along the same lines, when an economy is efficient but not flexible, it will eventually be outpaced by places that can retool (Soviets vs the US in the Cold War).
Goals change as technology makes new things possible, or people’s tastes change, or we realize we’re going to torch our planet if we don’t decarbonize at some point (probably quickly).
Our ability to deal with new realities is best when we turn the engine of The Economy on the problem. It is feckless in the face of big challenges (like Climate Change) when we decide the best way to deal with our problems is to throw sand in the engine or slow it down.
In order to survive, to provide for each other, and to continue towards a future of universal prosperity, we must govern The Economy thoughtfully. It is far wiser to pursue policies that have proven to work and are rather easy to implement, than to experiment with ones that have struggled not to kill their own citizens by accident.
Governance structures
How we govern an economy is a reflection of how we value the life and labor of other people, as well as how we think prosperity can be achieved (and for whom).
An economy where your labor is equally valued to everyone else’s and the state will guide efforts towards universal prosperity says (on its face): that people are equally valuable, so is their labor (regardless of skill or effort) and that the state knows better than individuals what individuals need.
This also means that the state knows best how to get to prosperity. This is collectivism and it spawns systems like Communism and Socialism. They usually require planned economies where the state determines wages and directs production. So far this has always devolved into benefitting the elites at the expense of the people.
An economy where labor is rewarded based on a market-determined wage, and the state thinks that individuals that work together in cooperation will lead to prosperity says something very different about the nature of society. This is individualism and it spawns systems like Capitalism and Anarchy.
Anarchy usually devolves into tyranny by the elites (usually the people with guns), but Capitalism is different. So far, Capitalism has been the only system that has (in practice) sustainably elevated people out of poverty and given people social mobility based on their merits.
The governance structure of Capitalism harnesses human nature to maintain the ecosystem that incentivizes productivity, and continuously fight tyranny by the elites through ruthless competition.
But Capitalism requires some management by the state in order to keep The Economy benefitting people as a whole instead of just the elites.
All economics systems (especially communism and socialism) will eventually devolve into some version of Corporatism where the elites own and operate the corporations that hold all the means of production, and they are above competition or dissent. This always ends up stealing from the poor to benefit the rich.
Capitalism is no different, but Capitalism, by its very nature, requires a lighter touch. Governance structures must deal with the common failure modes that plague all economic systems, but with the added wrinkle of enforcing the rights of all citizens:
- When the money is broken, the elites confiscate wealth by printing money for themselves.
- When markets get distorted (subsidies, taxes, bans, bailouts, etc), we get shortages of what we need and surpluses of what we don't.
- When the Government favors incumbents (via regulatory capture, or failing to bust monopolies), competition withers and prices skyrocket to pad profits.
What is money?
Money is the technology we use to store and transfer purchasing power. Whether we use paper money, gold, salt, ration tickets, cigarettes, Bitcoin, they’re all ways to transmit purchasing power through time and space with what technology is available at the time.
Money is not purchasing power or wealth by itself. If you're the last person on Earth and you have all the money that's useless, right? Because you need The Economy for money to be useful.
Money is how we coordinate how we provide for each other.
When money can be counterfeited by some but not by others, that means the the counterfeiters are stealing purchasing power from everyone else. They're able to buy what they want without having to contribute to the Economy at all.
So a good money is hard to counterfeit. We cannot yet create gold from cheaper materials, it's hard to manufacture cigarettes in prison, there will only ever be 21 million Bitcoin, etc. These are "hard money" systems.
Paper money can be counterfeit by the government who issues it, which has always eventually been abused by the Government to bail itself and banks out after reckless behavior. This is called "easy money" or "soft money."
Capitalism devolves into state crony corporatism when the money used isn't very good. The state favors the elites via corporate handouts and bailouts using printed money which steals purchasing power from the people.
Hard money is necessary for the Economy to work.
Markets and prices
People and corporations have different goals and different available resources to achieve their goals. How we determine whether it's beneficial to transact is determined by prices. Prices are discovered via markets.
Money is the most precise way to price how valuable something is to you. You know how hard it was for you to gain that money, and you know how much you want the thing you want to buy.
Markets are how people come together to discover a price where buyers and sellers will transact.
In markets there are a list of sellers with a price they’re willing to part with their stuff at. There’s also a list of buyers where they set the max amount they’re willing to pay for something. Where they overlap, transactions happen.
Everyone benefits when this is done consensually and without distortions imposed from third parties. That’s how the price for things are discovered, but prices are changing all the time.
What goes into prices
A seller would be stupid to consistently sell their goods or services for less than it takes to provide it.
A buyer would be stupid to buy something for more if they could buy it for less.
The tension between these two things creates an equilibrium where prices are discovered. If the price to create something goes up, then the price the seller will need to charge will go up. If the buyer can't pay that price then no transaction occurs (which, in turn, incentivizes the seller to lower prices if they can).
If there’s a lot of buyers and sellers then the profit of the sellers goes down (lowering prices). Sellers that are the only provider can charge anything they want as long as buyers need it.
Prices are an equilibrium that is achieved in a market. Prices aren't set by corporations, unless there isn't enough competition for sellers to be pressured to lower prices.
It does not matter if the economy is managed socialistically, communistically, capitalistically, etc this is how things work.
The reason planned economies struggle is because it’s really hard to coordinate The Economy in a way where the sellers aren’t selling at a loss (and therefore eventually being unable to produce anything). And it's also incredibly difficult for consumers to get exactly (and only( what they want, which leads to shortages and wasteful surpluses.
Markets harness human nature to keep prices low enough for buyers to buy, and high enough for sellers to be able to continue producing.
Managing powerful incumbents
People are selfish and corporations are sociopaths. It's natural for wealth to become power and for powerful incumbents to work to preserve their incumbency against competition. This is bad for the people; it leads to state crony corporatism.
In Adam Smith's: The Wealth of Nations, the literal origin of the idea of Capitalism, he stresses that Capitalism cannot work without managing the incumbents to maintain competition. Monopolies will increase prices, decrease quality, suppress wages, etc.
Competition is the cattle prod that keeps corporations increasing productivity to pursue profit, instead of taking the shortcut of increasing profit through oppression and control of the state.
It's also unwise to just disadvantage the incumbents arbitrarily because there are benefits to scale that reduce prices for the people. So the tried and true methods for managing incumbents is anything that increases competition.
- Lowering barriers to entry: minimizing regulation so that new players can enter a market, but not so minimal that people are harmed by bad behavior of corporations.
- Break up monopolies and monopsonies: when corporations become too big of a player in a market (for a good, service, or a particular kind of labor) they can abuse that power to reduce competition. E.g. can't disrupt Google if they hire all the good engineers.
- Pricing externalities: e.g. there's a healthcare cost to pollution, the government can add a cost to everything that causes pollution in order to let market forces incentivize the creation of solutions that don't cause pollution.
Incentives are enough to preserve competition. Direct control / state ownership isn't necessary and always makes many more problems than it solves.
Managing the engine through incentives
Corporations are sociopaths, they’re not people, and so cannot be held accountable the same way people can (through jail, social pressure, etc). They are ruthlessly selfish and will do anything they are allowed in order to make a profit.
At the same time, they are also an amazing invention that helps people (owners and workers) benefit from the upsides of their efforts while limiting the fallout from failure. They encourage entrepreneurship.
Entrepreneurship is necessary to maintain high levels of competition, which keeps incumbents from becoming untouchable and abusing their power (via monopolies, wage suppression, etc).
The key to managing a capitalistic economy is bridling these corporations so that they do the good stuff and have limited ability to do harm.
The most effective way to control corporations is by simple, transparent incentives. Incentives can be
- Bans (jail time, prohibitively high fines, etc) on what is deemed harmful: dumping toxins in the water supply for instance.
- Taxes or fines for behavior that’s deemed “bad” but not intolerable: tariffs on foreign goods, taxes on tobacco, taxes on air pollution, etc.
- Subsidies for things that aren’t profitable in the market today, but are desirable: tax rebates for having kids, subsidies for onshoring production, or renewable energy projects, etc.
- Handouts: bailouts for banks, food stamps, etc.
- Directives: breaking up monopolies, mandating certain percent of insurance premiums must be spent on patient care, etc.
Some incentives are better than other incentives
- Bans are good when the people nearly unanimously agree they’re bad things: monopolies, murder, poising water supplies, stealing, etc. They’re bad when the people can’t agree if they’re intolerable (abortion, carbon emissions, nicotine, etc).
- Taxes generally suck because they don’t change human nature and they create a dependence in the government on that revenue: gas taxes for example became such a huge revenue source that as EVs replace gas cars states are hurting. Taxes can be a good thing as a way to price a negative externality, but in that case the revenue should just be handed back out as an income tax break to avoid dependence on the revenue.
- Subsidies generally suck (unless they’re baked in to be temporary): wind projects just aren’t very profitable in the market without subsidies even after decades of subsidies. But solar has been a success, subsidies helped spawn an industry that’s now getting cheaper on its own and is cheaper than alternatives without subsidies.
- Handouts generally suck because they create dependence: banks learn they don’t have to learn from their bad behavior leading up to 2008, food stamps help prevent starvation but there’s no incentive to progress towards self-reliance, etc.
- Directives are necessary to manage corporate behavior, but this power is often coopted to create regulatory capture (advantaging big players against startups).
Picking incentives should be focused on what’s the most effective way to keep corporations and citizens increasing productivity and reducing harm to the citizenry. That generally means banning bad behavior and pricing externalities.
Where are we driving this thing?
The engine of the economy can be directed to some extent by its leaders, so where do we drive this thing?
The amazing thing about Capitalism as the governance structure, is that when you keep the engine in tune, it continues to self improve. Profits allow shrewd people to re-invest in increasing productivity, which creates more goods, and more profit.
When there's more goods and services, then people have easier access to what they need (food, water, shelter, clothing, healthcare, etc), because increasing supply decreases prices (especially when you measure prices in labor hours).
The history of Capitalism is the history of this feedback loop steadily marching humanity towards a future of prosperity.
Capitalism (with thoughtfully placed incentives), eventually self corrects towards ever-lowering prices in the pursuit of ever-more profit. Since lowering prices leads to prosperity, Capitalism is the best, proven system to lead humanity to prosperity. Best part is that it needs no driver, just thoughtful governance to keep it on the rails.
This thing we call "The Economy" should be managed, not vilified, nor worshipped
Collectivists are correct that when corporations get too powerful they corrupt the state and use it to enrich themselves at the expense of the people.
Capitalists are right that a planned economy kills people, and cannot effectively improve the lives of its citizens over any serious length of time.
The Economy should not be worshipped as something that must be fed without regard to its impact on humanity. And it should not be vilified. The Economy is how we all work together to provide for one another.
If we manage The Economy well, then it will drag humanity forward into a prosperous and abundant future.