I heard this quote sometime ago, I forgot through which medium, TV, cinema, book, or magazine, but the quote didn’t come from me.
What I like about it is, the more I think about it, the truer it became.
On a micro scale at my own job, people made money when we make decisions. We decided to have a training program, ka ching for someone else. We decided to put above the line marketing, ka ching again. We decided to reward our staff who make good sales, ka ching again. When we didn’t decide or decide less prodigiously, there’s no or less ka ching to be made.
On a macro level, I learn that economic growth comes from money being spun again and again into the economic system. That’s why when an economy has too much savings, it could fall into a deflation trap, and face a zero growth period.
But I haven’t considered the effect of decision making to economic growth.
My theory is, the impact to growth from 1 people deciding shoes for 1 million other people would be far far less than when 1 million people deciding what shoes to buy for themselves.
The key is in the number of decisions made to achieve fulfilment of need or desire (1 million people deciding their own shoes), n of decision, not just the state of fulfilment (1 million people having shoes)
I will discuss the empirical support (I dare not say evidence) and the reasoning as to why such is the case.
In non-modern society, life is simple, both supply and demand of need and desire are few. Your decision revolves around waking up, going hunting, forage for fuel, cook food, eat, sleep.
Also in non-modern society, more decision are made by ruler, rather than individuals. Move your habitat from point A to point B, if you live in a community, most likely the decision will be made by an elder within that community.
Yet in modern capitalist society, there’s much to want, there’s a lot of decision regarding want that one can make. You wake up, you can decide that your bed is not comfortable enough, your pillow lost its fluffiness, the wallpaper in your bedroom has the wrong color, your flip-flops has lost it’s charm. Between the bed and the bath room, an American can make more decision that a tribesman would ever make in his life time.
Furthermore, in modern capitalist society, there’s more decision to be made by Individuals, rather than by a Grand Leader. This sounds a lot like liberalism, free individuals to make economic decision, reduce the role of government in making decisions. People are free to choose what brand of car to buy, rather than the 3 state own automobile company. People are free to cover their walls with paint, wallpaper, ceramic, granite, or other materials, rather than the dreary grey beton brute supplied by the state.
From the last two example, we can see, lo and behold, that what’s true in non-modern society is also true in communism. In communism the variety of want that the average citizen can have is limited, demand is controlled. And also in communism, not only that citizens has fewer wants, whatever wants they have is decided by the state.
This theory is supported by each explosive growth that occured after an economy becomes freer in 2 aspects:
– The variety of needs and wants of the participants (consumer electronics entering China, the variety of consumer electronic items)
– The decision to fulfill those needs are owned by the participants (chinese consumer can choose what consumer electronic to buy, can choose what brand, model, features to buy)
Why does 1 million people deciding their own shoes give more growth than the state deciding shoes for 1 million people?
The need is fulfilled, the economic resource needed to fulfill that need is deployed, and with that, money moves and economy grows.
– Innovation. When people are allowed to want more things and variety of the same things, this drives innovation. I want my wall covered with something other than paint, I want wallpaper, I want ceramics, I want granite. And when decide on wallpapaer, I can decide on texture, color, pattern, weight, material quality. All these variations exist due to innovation.
– Innovation cost more, it needs more money, more money are pump into the economic system. Innovation, in itself, is expensive. We move labor from producing food and other goods to imagining things (design the wallpaper, design the production of the wallpaper), to talk (discuss the design, negotiate the materials), to write (legal agreements, trade agreements). Millions dollar worth of labor diverted from the production of goods to produce innovation.
But, additional cost means more money is needed. More money is made and enter the economic system, giving more fuel to growth. Furthermore, this specialize job allow more people to join the productive workforce. People who were thought to be dreamers, talkers, and writers, unfit as labor in the muscle intensive pre industrial world can now find an occupation.
– Innovation increases the velocity of money. With more variety of wall coverings and wall paper, there’s more company designing and making these wall coverings. Each of these company do transactions, with their supplier and buyers, and who in turn do transactions with their own supllier and buyer. This increase the velocity of money.
Within these institutions, there are people working in them. And you know what? People make decisions that requires money. With more corporations and specializations, there’s more transaction made by individuals. Again, velocity of money increases.
– With both higher amount and velocity of money, the economy grows faster.
This is why, an economy system that allows more decision to be made would grow faster than an economy system that is more restricted.