Many introductory economics textbooks, micro or macro, focus their definition of economics around resource utilization and scarcity. Scarcity is important—it gives rise to tradeoffs, and, in one way or another, most of economics is about tradeoffs. It’s worth noting this profound emphasis on scarcity doesn’t imply the necessity of income inequality or for anyone to do without. It means that the earth exists with the resources and state of technology it has and there are only so many hours in a day. Resources we consume for one purpose are no longer available for other purposes. The way economists define technology will be the subject of a future post.
To understand economic growth, instead of starting with the whole world and the state of technology (or in the case of fiction, multiple worlds, radically different technologies, and maybe even magic), consider a fish pond. It has a certain fish population that can either grow, shrink, or be stable overtime.
Imagine there is a small population that subsists on the fish. Absent other resources or goods or services, the number of fish this population can consume is a direct representation of their standard of living. I did say this would be a very simple illustration—but by imagining an economy where there is literally only one thing, we don’t have to think about the relative value of fish versus agriculture or fish versus art. We can talk about those kinds of tradeoffs later— only fish here.
Examples like this are always crisper (left ambiguous) with numbers— so let’s say there are 10 fish in the pond, and every year each pair of fish can produce one fish that survives to adulthood (details of fish reproduction have little to do with the illustration—this is made up). In this set up then, the population can take 5 fish out of the pond every year and still have 10 in the pond going into the next time period.
If we wanted to make it more “realistic” we could have some fish die every period and introduce uncertainty about reproduction rates—these are all features that could be explored in future videos and posts.
If in one year more than 5 fish were removed, then fewer than ten fish would remain. For example, if 7 fish were removed, then only 8 fish would remain. Meaning, only 4 fish could be produced by those remaining five pairs. Even of consumption returned to the previously sustainable rate of 5 in the subsequent year, the fish would decline and dwindle with that rate of harvest.
After removing 7 fish in one year, the only way to make consumption of 5 fish sustainable again would be to replace the 2 extra fish removed in that year. This could be accomplished by consuming significantly fewer fish (for example, dropping to only 2 to make them up in one year).
That about sums up what’s in the TikTok. If you’re interested in more discussion– what’s below extends that, considering a starting point of 200 fish (sustainable harvest rate of 100 fish per year). But you’ve got the main idea: an economy has certain resources that imply what it can produce; decisions today about consuming resources determine what is available to support future consumption. More about that next time.
Continuing the example
Let’s assume consuming 100 fish is adequate to sustain the population, but not in luxury, meaning there would be some value to the population of having more fish. If more fish would have value (utility), we may ask, how our hypothetical folks could raise their standard of living. There are three ways: 1) consume at a rate above the sustainable rate; 2) consume fewer fish now to leave more breeding fish in the pond; and 3) get more fish from somewhere else. We will walk through each of these.
Burn the furniture
If our hypothetical population would like to consume more than 100 fish in a time period, no one is stopping them, but there will be consequences. If in one period 120 fish are removed, only 180 remain (300-120 = 180). The 180 fish produce 90 fish in the next time period. In this scenario, consuming more than was produced in the present time period reduced the productive capacity for the future. If it happened again, consuming 120 when the population included 180 breeding fish and 90 new fish (270 fish), only 150 fish would survive to breed in the third time period. In that third time period, they could produce only new 75 fish. Consuming at a rate of 120 fish per period would ultimately destroy the entire productive capacity of the pond.
The phrase “burn the furniture” refers to a situation where a household or a business consumes resources to survive, with no capacity to replace those resources—stemming from the idea that to survive a hard winter, a person with no resources might burn their furniture to stay warm. In survival circumstances, this would certainly buy time to find other solutions, but absent identifying other resources for the future (or the furniture) it isn’t a strategy that’s sustainable or has a natural happy ending.
Put it in the bank
We’ve established for every two fish that stay in the pond, they can pull one out sustainably (200 fish produce 100 in a year). Having more fish in the pond would mean more fish could be harvested from the pond every year.
If in the present period they could consume fewer, say 80 instead of 100, they would have more productive stock of fish (220 fish) going into the next year. In that next year, starting with 220 fish, the single year yield of fish would have risen from 100 to 110 for the 20 they left behind in the prior year.
In this very simple scenario, the change in productive capacity is permanent. If they keep consuming 110 fish, they will leave 220 behind in the pond, to produce 110 fish again in the subsequent period. If they consume less than 110 fish, the productive capacity rises again. And the productive capacity will continue to rise anytime they consume a number of fish less than the number of new fish produced in a period. Any fish banked for the future raise the productive capacity of the pond.
If you recognize within this example something of the real-world austerity policies of economic development organizations like the World Bank or the International Monetary Fund, you wouldn’t be entirely wrong (and that’s not an invitation to tell me it is more complicated than that). And if you have ever looked at those policies critically and asked how austerity could help people who were struggling economically, you also wouldn’t be wrong. If folks are hungry at a consumption rate of 100 fish per time period, reducing to 80 fish could be catastrophic.
A little help
I mentioned a third option that could let our population raise their fish consumption rate— get more fish from somewhere else. This may sound like breaking the rules of the scenario we set up, but let’s assume there are other ponds in the world, other populations, and all the ponds are initially endowed with different numbers of fish—a global fish economy. If our original fish pond community could consume only 100 fish and add 20 fish from another pond to theirs (or only extract 80 fish and consume the 20 from abroad-no difference), they would experience the same growth in productive capacity that they would have under the austerity approach, though they would do it without going through a lean period.
Let’s assume they don’t go to war to get more fish—though there are plenty of examples of wars fought over resources. The remaining question would be under what circumstances folks with a greater number of fish would be willing to share. This is likely the focus of a future post, but absent violence, we’re left with either altruism or our fish pond nation owing the other fish pond nation. There’s a lot to dig into there with the relationships between economic growth, debt, and international trade.