Tuesday, February 26, 2008

Economics of Growth

If you want people to buy something, you can do one or both of two things. You can lower the price, or you can make it more attractive than the other choices. The amount that everyone wants to buy is called demand. But that's only half the story, because you need to have enough of it to sell them. That's called supply. The more supply you have, the more you can sell, and the more demand you can handle. Creating a supply of something takes a lot of work, whether it's digging something out of the ground or training yourself so you can teach someone. It also takes work to get what you're selling to the people who want it. Most people want some reward for the work they do, especially if it's something new and there's some risk involved, so they increase the price by the amount of reward they want. That increase is called profit.

In a community that doesn’t use money, people are expected to work, both taking care of themselves and helping the community. The work is the price they pay. What they “buy” are all the advantages of a group: mutual protection, help on projects too big for one person, and emotional support. But this only applies to communities that either can't or won't grow in size or wealth (the amount of resources each person can consume).

If a community does choose to grow, then the people working on the growth aren't buying the advantages of the group any more, they're buying the promise of having a more resources in the future. But it is a promise, not a sure thing. That's where risk comes in. The people developing new resources still need to survive, so the community pays them without knowing for sure that they'll get anything back. That's called “investment.” When and if the new resources become available, then the difference between the amount of new resources and the investment is the profit, which is equivalent to the amount of growth.

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